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. Amazon.com 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.