Monkeylytics

One of the fun things about posting any sort of predictions on the Internet is how smart or stupid you look at the end of the year since there is a digital trail of sorts (well, I guess I could go back and edit my old posts to make me look like a genius, but what’s the fun in that?) My personal portfolio didn’t do anywhere near as well as the blogged trades did. Maybe that should be my investing philosophy: only trade that which I would blog about publicly. No, that’s not simple enough. How about: if I blog about it, it’ll do well! That’s easy!

• Sold off Arm Holdings (ARHM) and Nvidia (NVDA) in January 2011. That was a 90% and 68% gain respectively. Actually, I bought NVDA again at $12.73 in August 2011 for pretty much the same reason I bought the original stake. We’ll see how Mr. Market treats me the second time around. I also bought some Intel (INTC) later at $21.19 which is a 18% gain so far (14% stock price appreciation but then you factor in that fat dividend…)
• Demand Media (DMD) being a lousy investment. Yup. A -70% return for 2011. What Google giveth, Google taketh away.
• Global markets being in for some tough times in 2011 and 2012. Yeah, I still stand by this one. 2011 was pretty wobbly with a brutal Q3 and gave you a pretty good idea of what’s on the horizon. The global markets are in a tough place and will continue to be very shaky. Do things finally unravel in 2012 as people start to acknowledge the futility of just tossing good money after bad just to postpone the inevitable? What’s really weird about this whole thing is that none of these issues are particularly new. So, what’s with all the market gyrations going from euphoria to despair and vice-versa? I get a surprising amount of natural search traffic for “liquidity crisis vs solvency crisis” for something I wrote in May 2010, and the basic thrust of that post hasn’t changed much. If there’s a big picture train coming where I’m confident of the outcome but not on the timing, I just get off the track and wait. I’ll still make the occasional individual bet, but I have no problem keeping my powder dry and waiting patiently.
• Buying Take Two Interactive (TTWO) at $10 in hopes of an acquisition in the next two years. Ok, 1.5 years have passed. No acquisition. TTWO has gone as high as  $17 in 2011 but now sits at $13.50. 2012 or perhaps the start of 2013 (whenever GTA5 starts selling in earnest) is probably Take-Two’s short-term peak. Their launch schedule in the next say 15 months is as strong a lineup as you can ask for. If it doesn’t get bought out in that time period, then I’ll probably cut my position at least in half because that’ll be a high bar to hurdle afterwards. I might keep some around to see if they can organically grow anyway. Once upon a time I was an Activision shareholder a number of years ago and sold for similar reasons. Argh.
• Barnes and Noble (BKS) trade: Bought at $9.20 when everybody thought it was going bankrupt and sold at $14.11 for a 53% gain. It went as high as $18 on the back of its Nook tablet success and the hopes of a John Malone takeover which later on became a strategic investment instead. But the not-so-sexy story behind the Nook’s success (and their online operation) is how much it’s costing them.
• The ridiculous valuations placed on the current generation of Internet companies. Facebook will likely come out in 2012 barring a sharp market downturn which means you’ll see others (eg, Yelp) trying to ride out on its coat-tails. One wonders what the appetite for these types of companies will be given their surprisingly bad short-term (maybe long-term…) economics and nosebleed valuations. If you bought on the open market, the returns of these stocks have been poor since 6/30/11 (when my post was written) or the IPOs that came afterwards.
• LinkedIn (LNKD): -30%
• GroupOn (GRPN): -21%
• Pandora (P): -42%
• Zynga (ZNGA): -1%
• And when you combine sexy Internet sizzle with “OMG CHINA!”, you get some stratospheric valuations that set up you up for big falls if you don’t get perfection.
• I was looking at Angie’s List (ANGI) ‘s S-1, and ugh, that is some ugly stuff. So, for the current $800M market cap today, you get a company that lost $25M on a $38M revenue base for 6 months into 2011 and $27M on a $59M base in FY2010. I’d love to see who’s buying this type of stuff and what the trade rationale is.
• There might be some euphoria associated with Facebook’s IPO that might lift all boats, but given the poor economics, bad macro-environment, and still ugly valuations, I expect more pain in these types of companies by the end of 2012.
• Shorting Netflix at $300. Well, that was dumb luck with respect to timing. Covered at $232 because I thought I was sooo lucky to get a 23% return in a month and it just wasn’t falling enough in a down market which made me nervous about a rebound. It’s currently at $70. Oops. This is where I break out the “I got rich by taking profits too early” defense.

I’ve been a Netflix subscriber for quite a while. I think since 1999 (on an odd note, I thought a friend recommended it at the time, and it turned out that he doesn’t remember doing it and actually didn’t join until later). As a thank you for my tenure, they even still have me on 4 DVDs unlimited for $19.99 years after they’ve changed the policy.

Now, I suppose it helps that we’re incredibly bad with watching movies from Netflix. We’ll have like 2-4 DVDs unwatched for months (or watched but then not returned for weeks to months) Even at our peak, we were never super heavy users. So, I must be their best customer ever in terms of customer life time value: I pay them every month for 11 years, and they don’t have to do much. We probably watch Netflix streaming more now than we watch DVDs, but again, it’s pretty light.

So, Netflix’s recent decision to substantially raise prices in a sketchy sort of way without really offering anything meaningful in return was a bit of a bummer. The reality is that I don’t care much either way. It’s not like I’m getting my money’s worth out of Netflix now. An extra $10 a month isn’t going to change the utility (or lack of) of my subscription. Hey, you have to admit I’m honest with myself.

But like I said, I’m in the Netflix Customer Lifetime Value Hall of Fame. I’m pretty sure a lot of people aren’t that stupid and lazy, and the furor over the Internet on this has been impressive. It shows how much goodwill Netflix has truly built over the decade to get so many people so angry so quickly. The opposite of love ain’t hate; it’s indifference, right? The branding was so strong that Netflix management believes that adoration can be transformed into obsequiousness. Heck, maybe they’re right.

I had always stayed away from Netflix (NFLX) as an investment despite almost being in at the ground floor as a customer. I thought about it in 2003 but thought the margins just sucked too hard and competition would be too tough given the high valuation (oooops!). I knew the stock had done well and was a momentum favorite, but I never bothered to look at it much.

But when I heard about the price increase, I was surprised that a company would be so heavy-handed towards a mostly adoring customer base. It’s not like there’s a lack of video options these days, and there will be even more in the future. And so I took a look at the stock again, and my eyes popped out of my head.

I'm sure it's worth every penny

That’s a stunning graph since the Great Recession. I know that Netflix drove a lot of subscriber growth, and a lot of people turned to cheaper forms of entertainment when money got tighter, but a $16B valuation and 85 x trailing earnings. I’m comfortable that Netflix will be a big player in digital media, but this almost looks like it’s assumed they’ll be the biggest winner in the era of Amazon, Google, Apple, cable/dish, etc. all getting into the game more. Netflix drove Blockbuster under because of Blockbuster’s fixed costs, but what about Netflix’s fixed costs weighing it down against the purer digital players despite its customer base? No worries at all apparently. I like Netflix and all, but crap, that’s a “no troubles at all for the next 10 years” type of valuation.

Then again, this same thinking got me to skip it in 2003, and look at where that got me. But somehow, I don’t think it’s going up another 10 x in 8 years. A good example why is two good Seeking Alpha interviews (actually the debating comments are much more interesting than the actual interview) from Rocco Pendola with Len Brecken (part1 and part 2). Apparently, it’s been a Holy Grail of sorts for shorts who went after it, and the shorts….ate their own shorts. I wonder what Whitney Tilson is thinking now as customer goodwill seems to be the primary support for his reasoning on why he painfully covered (the stock is up another 30% since that letter!) But yeah, even if the details are off, I agree on the general thesis: their economics seem fishy, the valuation is now in the goofy range (it can always get goofier), and now there’s this interesting brushfire of customer outrage amongst the ones supposedly the most behind the subscriber surge. Does it spread into a wildfire or not? With that kind of momentum investor driving the stock up, what happens to that nosebleed valuation?

I don’t short much, and when I do, I usually wait until the the die is cast and the bubble starts rushing out of the air with no hope of patching things up. I wait for blood in the water basically, and I always cover too soon. So, I’m a chicken shit type of short. This isn’t that kind of situation. So, I’ll probably regret this, but sure, I’ll give it a go. There was part of me that wanted to go long on Redbox’s parent, Coinstar (CSTR), as a type of weak hedge, but nah…

(Probably still keep my account though. Probably another reason why I’ll regret this short.)