Who rewrites headlines? Man or machine?

As many of you know, Netflix is the most highly valued (or, overvalued) stock in the universe. Therefore, we come across lots of breathless reports about how amazing its business is. Investors are willing to pay $85 for each $1 of earnings, which is roughly in the Google range when Google went public.

 

This little snippet caught my eye when I looked at Google News last night.

 

 

Wow, 1 in 8 Americans have Netflix, that's a lot of people! With roughly 300 million people, 1 in 8 would be 38 million customers. As a non-subscriber, I would feel left out!

Then, I clicked on the link, which led to a CNN Money article.

The strange thing is the article has a different headline. I'm not sure if the Google machine created a different headline for use in Google News, or someone at CNN Money wrote a headline specifically for Google News, or what, but it's interesting they are different.

Now, 7% of Americans is not the same as 1 in 8. Seven percent of 300 million is 21 million, which is close enough to the 24 million reported in the article. Alternatively, divide 300 million by 24 million, and we have 1 in 12 or 13 Americans. That's still a lot of people but 1 in 12 ain't 1 in 8.

 

***

 The article notes that Netflix just surpassed Comcast's number of subscribers. How impressive is this feat? Perhaps the writer should look into "price elasticity": demand goes up when price goes down?

Netflix is getting roughly revenues of $30 per user per quarter, or $10 per user per month for its 24 million customers. Comcast, by contrast, gets $80 per user per month, 8 times as much, with a similar number of customers. (Comcast has a price-to-earnings ratio of $20.)

From a revenues perspective, Netflix needs to add 8 customers for every customer Comcast adds. One wishes CNN Money tells you about this while it breathlessly reports on Netflix's rampant growth.

 

Comments

[HarlanH]

Hi Kaiser. Might the discrepancy be people vs. households? There are 300 million people in the US, but more like, what, 100 million households? Most households share a subscription (although my wife and I do not!)....

[Ken]

There seems to be an assumption that building market share is worth a lot of money. If you look at Amazon their price was about $80/share in 2000, dropped to less than $20 in 2002, and has risen to over $180. Looks good for early investors but the PE ratio is still nearly 80.

So when do they make money ? Presumably when they have cornered enough of the market to stop discounting. Of course then WalMart or someone will look at this and decide we can make money on an internet store, we'll only stock the 1000 most popular books but our marketing will be that we are always cheaper than Amazon. That has been the problem with a lot of bubble stocks,

[Kaiser]

HarlanH: Agree that a base of households would make more sense but that's not what they use either.

[Disinterested Observer]

Might this just be a misreading by someone at some point? The ratio of 1 in 12.5 (300/24) could have been misread as 12.5% which is 1 in 8.

[Tom West]

1) Is NetFlix profitable?
2) Comparing income per subscriber with Comcast ifnores the fact that Comcast's costs are a *lot* higher. (All those boxes to make, cables to install...). A better comparison woudl be profit per subscriber.
3) The fair value of a company is the total future profits, discounted to present day terms. So, if you have a 5% annual discoutn rate and a constant profit, the fair value is 20 times annual (=current profit). If a stock is worth more than this, it means the market is either (a) wrong (b) expects profits to rise and/or (c) is using a lower discount rate. I think (b) applies with Netflix.

[Kaiser]

Tom: Good questions. 1) NetFlix is profitable, you can see this because it has a P/E ratio. It is also transitioning from the DVD to the streaming business so comparing profits with a mature business is not necessarily appropriate. 2) Fixed costs like equipment and cables are different from variable costs (like royalty fees and bandwidth fees). I suspect Comcast will look even better on profit per subscriber. 3) You can impute the growth rate the market expects based on the current market price of Netflix (and assuming a *model* of the relationship between growth and value). I haven't done this but I suspect the result won't be pretty.

A note on NPV type analyses: in my view, they have no value except to make explicit hidden assumptions. The point forecast is meaningless because these models contain so many assumptions that the forecasting error is huge. Most such models ignore correlations between assumptions, and if they do account for it, those correlations are almost impossible to estimate. Also because the forecasting error is huge, if one extracts interval estimates honestly, those intervals are too wide to be useful. I use them only for sensitivity analysis and making sure I'm not making ridiculous assumptions.