This $8 Billion Money Manager Has Bought Netflix, Inc. Should You?

Netflix offers great potential, but also some risk. See if you think the risk is worth taking on.

Aug 29, 2014 at 6:30PM

Source: Netflix.

We should never blindly copy any investor's moves, no matter how famous, talented, or successful the investor. Still, it can be useful to keep an eye on what smart folks are doing. 13-F forms can be great places to find intriguing candidates for our portfolios.

For example, a glance at the latest quarterly 13F filing of Tiger Global Management shows that its second-largest new holding is Netflix (NASDAQ:NFLX), with its position representing 2.2% of its portfolio and its 19th-largest position. Tiger Global's reportable stock portfolio totaled $7.9 billion in value as of June 30, 2014, and contained just a few dozen stocks. Indeed, the top 10 holdings make up about 58% of the overall portfolio's value.

Why buy Netflix?
Netflix has been making a lot of smart moves lately, and growing. It recently passed the 50-million-subscriber mark (with 36 million in the U.S. and 14 million abroad), and it has been expanding into new markets abroad, too, where many economies are growing more briskly than ours. In the third quarter, it plans to launch in France, Germany, Belgium, Luxembourg, Switzerland, and Austria. Some expect Australia and New Zealand to follow soon after.

In its solid second quarter, Netflix's revenue surged 25% year over year, with earnings more than doubling. (International revenue soared 85%.) It has become not just a content deliverer, but also a content creator, with highly successful original programming such as "Orange Is the New Black" and "House of Cards." Its business model bodes well, too, especially now that its more-costly-than-streaming DVD-mailing service is shrinking. With its focus on streaming, it can pay a lot to secure a lot of content, but those fixed costs will be spread out over more and more paying customers, boosting profit margins. Also helping profitability is its recent $1 price hike, from $8 to $9 per month. The fact that this increase didn't seem to get in the way of subscriber acquisitions reflects strong pricing power and customers seeing value in its offerings.

Why sell Netflix?
All that is quite exciting, but Netflix has its share of bears, too, with reasonable concerns. For starters, there's the fact that shares of Netflix have surged more than 65% over the past year and have averaged annual growth of 41% over the past decade. Thus, its P/E ratio is a steep 178, while its forward-looking P/E is a still-lofty 72. You might argue that its rapid growth justifies the company's valuation, but Netflix's P/E, price-to-book, and price-to-sales ratios are all above its five-year averages.

It's not without competition, either, including new rivals such as Shomi in Canada. offers substantial streaming content for free to its Prime members (while charging them and others for lots of other content) and now even HBO Go is becoming more of a threat as it adds Time Warner content to its previously just-HBO-generated content. Worse still, Amazon and Time Warner are joining forces. (Netflix subscribers outnumber HBO's and those of the Time Warner premium network, though.)

Another problem Netflix has faced is connectivity, as it has had to pay Comcast, Verizon, and AT&T to secure faster streaming for its customers. The cost of content is also an issue, as it's huge and getting huger. In the company's last quarter, the cost of revenue, which is mostly cost of content, represented 68% of revenue. Still, that's down from 71% in 2013 and 73% in 2012, so while the absolute number is growing, it's shrinking a little proportionately.

Netflix has much potential, but also considerable risk. A lower price would compensate for some of that risk. Risk-averse investors should steer clear, while others might want to keep the stock on a watchlist, waiting for a pullback, or they might want to buy portions of a desired full position over time.

Here's one more way Netflix is profiting...
You know cable's going away. But do you know how to profit? There's $2.2 trillion out there to be had. Currently, cable grabs a big piece of it. That won't last. And when cable falters, three companies are poised to benefit. Click here for their names. Hint: They're not Netflix, Google, and Apple.

Longtime Fool specialist Selena Maranjian, whom you can follow on Twitter, owns shares of, Netflix, and Verizon Communications. The Motley Fool recommends and Netflix. The Motley Fool owns shares of and Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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