Netflix Q4 results

Netflix announced their fourth quarter results, disclosing a 36% increase in profits, and a 31% increase in subscriber base (now over 12 Million) and saw a positive market response of a 13.24% increase in their stock price.

Macro-level news

This week in class we have been talking about "Top-down" analysis (which by the way, we will typically discard in favor of bottom-up analysis). This article mentions that the futures price is indicating an increase in overall market value (for the S& 500), while we didn't discuss these instruments in detail, we have been discussing interest rates (which are expected to be unchanged in the Fed's policy statement due this afternoon), there is also some discussion of additional factors and their expected impact. Note that Apple is set to announce a new product (the tablet) this afternoon, I'll write about this event separately after it occurs. This related article Before the bell: Futures higher amid upbeat earnings also notes some interesting factors and raises some additional points relating to the (expected) turn-around in the housing market.

So given the level of the S&P 500 closed at 1,092.17 yesterday, if we are expecting some possible impact on the market will it be long-term or will it be short-term? What is your estimate of the level of the S&P 500 in the final weeks of class? Moving to our firm level analysis, what tools do we have to incorporate any expected returns on the S&P 500 index into calculating value of the individual companies we are following?

Valuing facebook

Related to one of our class exercises is the question of how much can these social networking sites be worth?

As a starting point you will notice that all three of the commentators in this article "How much is facebook really worth?" are basing their estimates on multiples of revenue. Of course revenue growth without growth in earnings (and hopefully even residual earnings) tends not to add value in the long-run.

Another point of contention arises between the three authors on the selection of a suitable comparable firm, is it myspace (1st author)? or is it yahoo (last author)? Clearly the assumptions of the value of facebook are widely varied based on the selection of the comparable firm.

Is facebook worth 15 billion?

The hard(ware) and soft(ware) of it

Apple Inc, is involved in lawsuits relating to the use of its operating system software on computers with PC hardware. According to this article "German Mac clone maker claims immunity from Apple" is selling Intel loaded computers with Mac OS X operating system software pre-installed. An entry-level computer sells for about $643, relative to the entry-level iMac selling at $1199. The issue is that the end user license agreement (EULA) for the operating system 'forbids' the user from installing the software on non-Mac hardware.

But for Apple's valuation, we have a bigger issue in play, what happens if the anti-trust lawsuits prevent Apple from 'forbidding' the installation of their software on non-Mac hardware? Is the EULA an effective barrier to entry?

Clearly, Apple's strategy is likely to remain the same - product differentiation - rather than them trying to compete in low cost alternatives. Does this news, however, change your expectations of future ROE for Apple? How would you expect the profit margin and asset turnover ratios to change in the next few years? How would this affect your forecasts?

Some more banckruptcy predictions

In this article in Seeking Alpha, Rick Newman highlights 15 companies that he thinks will not survive 2009. Given how much we have analyzed Blockbuster, are we surprised that it makes the list?

In our financial ratio analysis of Blockbuster it may be well worth our time to estimate some of the default probabilities. Perhaps this would be a good time to try out your eVal software and take a closer look at BBI's numbers?

Overstock's overstuffed profits...

I hadn't looked at Overstocked for a while, but I came across this article recently "Overstock.com and CEO Patrick Byrne Violate Accounting Rules in Q4 2008 Financial Report" interestingly enough it appears that there is no interest by the company to correct, or in accounting terminology, to restate, their financial reports (see here).

What do you think the market response to firms that restate their earnings to be on average? In a paper published in the Journal of Accounting & Economics, Palmrose, Richardson and Scholz find that over a two day window, these firms experience a negative 9% drop in their share price, with the most negative declines being when the restatement is enforced by the SEC.

My guess is that Overstock is headed for a rough time... what kind of change would this make in our valuation world? Obviously the current period earnings are affected, but does this change our opinions of growth too? How important is it for a firm to 'return to GAAP profitability'?

Valuing Netflix earnings and growth

At the time of this post, the market was valuing Netflix at $37 per share, one year ago the share price was $26.89. The raw return for the stock over the past year was( ($37-26.89)/26.89) = 37.6%

One question to ask was how did Netflix beat the expectations set at the end of last year...?

One interesting article that discusses some of these expectations (at the time) is the article "Netflix looks like a bargain again" written about a year ago, along with expectations about 2008 written in the companion piece "Netflix 2008 Outlook" where the author discusses expected growth rates in subscriptions.

What do you believe the Outlook for 2009 will look like?