By Brian Nelson, CFA
You won’t see us holding Netflix (NFLX) or Energy Transfer Equity (ETE) in the newsletter portfolios anytime soon, and recent news only supports that viewpoint. We talk about companies not included in the newsletter portfolios as part of their ongoing research and valuation coverage on our website.
I must say that as a recent subscriber to Netflix, some of their movie suggestions sent via email haven’t been all that bad – their algorithm must have me figured out. As a logical thinker, and not one swayed by spontaneous gratification, it’s still hard to forget the shortcomings of their content library, in aggregate, however, “5 Reasons Why We Think Netflix’s Shares Will Collapse.” Even if we were to forget about encroaching competition from Amazon (AMZN) Prime, the latest string of news only speaks of additional competition for the digital streaming giant over the long haul. The sell-side analysts covering the stock have literally lost their minds with their valuation assessments, and a more ominous long-term picture is developing.
Startups such as The Screening Room, backed by Sean Parker, who effectively with Napster set the public’s perception that everything on the Internet should be free (big mistake), plans to offer an at-home movie service that would allow consumers to watch movies the very same day that they are in theaters. Perhaps this is more a shot at the movie theaters including AMC Entertainment (AMC), Cinemark (CNK), and Regal (RGC) than Neflix, per se, but implications have yet to be fully assessed, in our view. In this day and age, every industry is being disrupted, and with the advent of more “powerful” home-movie theaters, why wouldn’t consumers want to watch their favorite releases the day they come out? Parker and team may have their work cut out for them to smooth things over with the theater owners, and we’d expect those choosing a higher-end home movie platform may not have the spare cash or even interest to keep Netflix in their viewing arsenal.
But that may not be all that’s in the pipe as it relates to what is becoming an increasingly more crowded digital streaming space. The biggest threat may appear as déjà vu for some, Outerwall’s (OUTR) Redbox Digital, which will be the company’s latest foray into the online video market after Redbox Instant, which had failed due in part to what the company reported as criminal activity, according to Variety. Though Netflix may benefit from greater brand awareness, we think Redbox will be far more committed to this latest digital iteration as fundamental performance continues to wane and physical rentals face pressure, “Three Blow Ups after the Close February 4.” Activist investors have been swarming Outerwall lately, and the company recently announced that it is exploring strategic alternatives, which came with a hefty dividend increase, perhaps in part to scare off the “shorts.” We’ll be monitoring developments at Outerwall closely, and we think it will make inroads to Netflix’s domestic dominance in time. Netflix remains irrationally overpriced.
In other news, you don’t have to look too far on our website to find how spot-on our work has been in the master limited partnership (MLP) arena, and particularly with respect to entities such as Energy Transfer Equity (ETE) and its subsidiary Energy Transfer Partners (ETP). Today, we got word of something we had been expecting all along – synergies of Energy Transfer Equity’s deal with Williams (WMB) would be far less than originally promised. We’re not talking about a haircut but by a significant margin: the company now expects EBITDA synergies of ~$170 million a year by 2020 compared to previous forecasts of more than $2 billion! How could things have gotten so far out of whack where there’s a revision of this magnitude (90%+). Remember: these were supposed to be equities that were largely “commodity-price immune.” You didn’t buy into that nonsense, did you? We’ve been saying for some time, “low oil prices and higher capital costs” would significantly punish most of the energy MLP arena, and they have.
Meanwhile, the Valuentum newsletter portfolios are doing great. If you haven’t before, we hope you see the value of unbiased, independent research and the talent of the Valuentum team now. Judgment — not data — matters.