Name That Trade – $NFLX $TWX: Stream Dreaming

by Dan September 21, 2015 3:39 pm • Commentary

Last night’s PrimeTime Emmy Awards reinforced a popular notion that network TV is toast, and cable and streaming services, for now have an unflinching hold on the highest quality content.  HBO has been dominating awards for years (and it continued to do so last night), and it was only until very recently where smaller cable networks like AMC have made significant inroads with the likes of Mad Men, Breaking Bad & the Walking Dead and Netflix’s success with House of Cards and Orange is the New Black.  It seems everywhere you turn some upstart media company has signed on big producer/director/actor combos to get in the gaming of original streaming or cable content.  Which is why the about face that Netflix did last evening, and the arrival of new entrant Amazon is worth noting for those who think much of NFLX’s 1000% gains in its stock in the last 3 years has much to do with the success of its original programming. Here were the stats on AMZN vs NFLX in last night Emmy’s, from

Last year, Amazon’s streaming video service received a grand total of zero Emmy nominations, compared with 31 for Netflix.

This year, Amazon AMZN topped the award tally of its streaming rival by taking home five Emmy statues despite having roughly one-third of the number of nominations Netflix NFLX did. Netflix won four Emmys last night after being nominated for 34 awards, while Amazon only received a dozen nominations, but still walked away the biggest winner among the streaming services.

Apart from HBO Go getting bombarded with logins after host Andy Sandberg mentioned his username and password (here), the network had an epic night, from

it was a huge night for HBO, which owned by Time Warner TWX, as the premium cable network led the TV pack with a whopping 43 Emmy wins after scoring triple the number of nominations of its nearest competitors (126 Emmy noms for HBO, compared to 42 for ABC). The Emmy runner-up to HBO was NBC CMCSA , which won 12 statues — the same number taken home by the HBO’s “Game of Thrones,” which won for best drama series and set a record for the most Emmys awarded to any series in one year.

Time Warner (TWX), owner of HBO and its streaming service HBO Now and HBO Go, has seen its stock decline nearly 25% since the start of August when investors in media stocks finally got the memo that there is a fairly important secular shift going on in the way people consumer and pay for original content.  In fact tens of billions of dollars in market capitalization has been shaved off the stocks of  DIS, CMCSA, FOXA, CBS and VIA since the start of August as investors fear lower profitability as consumers cut their cable cords and or look for skinny bundles.

But, back to that content.  NFLX was largely perceived as the thorn in traditional media company’s sides.  As the stocks listed above slid in August, NFLX made a new all time high, as the perceived beneficiary. But if NFLX can not continue to make hits, and make no mistake they will continue to spend hundreds of millions trying, then the product offering is much less compelling in a what is becoming a very crowded space for both original content and delivery platforms.  There has been discussion of NFLX’s off balance sheet liabilities which have risen to the mid single digit billions, and Aron Pinson did a great job here earlier in year discussing the implications on the company’s capital structure.

The stock makes little sense to me as I don’t find their original content compelling, think their library of non-original content is piss poor and their delivery mechanism is run of the mill. But I am also hard pressed at the moment to put my finger on a catalyst that would cause the stock to implode.  Last night’s showing at the Emmy’s shows a potential crack in the foundation, but I suspect higher costs associated with their very important international expansion and some sort of subscriber blip in the U.S. when they report their Q3 results on October 14th would do the trick, But trying to pick a top in NFLX has been a fools errand. The stock has rallied 17.5% on each day following its last three earnings reports!!

All that said, the stock appears to be holding onto $100 for dear life, and there is little technical support until $80:

NFLX 1yr chart from Bloomberg
NFLX 1yr chart from Bloomberg

As for that 17.5% average rally over the last three quarters, the options market at the moment is implying about a 16% move in either direction between now and October expiration, which will include their Q3 earnings report.  Seems fairly reasonable in some bizarro sort of way, but a very hard way to make money, and actually and easy way to go broke 🙂

If we were playing would you rather, I’d be far more inclined to own TWX marked down 25% in less than 2 months, with a $57 billion market cap and $28 billion in expected sales as opposed to NFLX with a $42 billion market cap with a little less than $7 billion in expected sales.

We will circle back on both names as we get closer to the perceived catalysts, which will be earnings, but I suspect we avoid NFLX all together (it’s kind of on our banned list) and could be inclined to take a shot on TWX on the long side, possibly in the mid $60s.