NFLX is the New AMZN?

sspencerSteven Spencer (Steve's) Blogs, Trading Theory1 Comment

Netflix is the new Amazon. What does this mean? It means for the foreseeable future hedge funds will step in and buy this name on every large dip and it will continue to have huge breakouts after periods of consolidation.

Why is this the case? In the case of AMZN it got enough large players in the market to buy in to the idea that it was going to be the Wal-Mart of the internet. WMT is far in away the greatest retail company in the history of the world with sales in the hundreds of billions of dollars. They were able to figure out how to provide to consum-ers the products they wanted at the lowest price possible. WMT was light years ahead of the competition in the integration of technology to their operations.

So if large market players believe that AMZN eventually will be the equivalent of WMT on the internet then AMZN will continue to grow for decades as purchasing behavior continues to shift online, and therefore every dip in AMZN’s stock price is viewed as a buying opportunity.

The question a trader needs to ask is whether NFLX has created a similar story of enormous opportunity for growth for the foreseeable future? I think so. The traditional model of delivering entertainment to the home has been the cable provider for decades. Broadband connections have slowly begun to help erode that legacy model. Consumers of the future will continue to shift away from the inefficient delivery mechanism which is the “cable bundle”.

After NFLX had dropped from 300 to 130 two years ago┬áI took a survey of SMB trainees who were all in their 20s. When I asked who had a NFLX subscription 100% raised their hands. So apparently the popular meme that NFLX is just for kids cartoons is BS. NFLX clearly has demographics on its side…

In the entertainment space NFLX’s only current legitimate competition is HBO, which it has surpassed in subscribers, and HBO is tied to a legacy cable business model limiting its growth opportunities. I listened to the CEO of HBO a few months ago try to painfully explain why they weren’t offering subscriptions directly to consumers. When you can’t explain in a clear and concise manner a reason for a fundamental business decision you have a problem.

There are other similarities between NFLX and AMZN that funds can hang their hats on as they scoop up shares into each pull back. Hastings seems as obsessed as Bezos with customer experience which has led to NFLX creating the most efficient content delivering system on the internet, and coincidentally enough relies on AMZN infrastructure. Another huge part of NFLX knowing their customer is their algorithm that is able to recommend content based on all of their customers’ viewing habits and show evaluations. This seems to be a competitive advantage as it allows them to encourage more use of their product further ingraining its value to the subscriber.

The final similarity between NFLX and AMZN is Hasting’s obsession with gaining as many subscribers as possible. It is clear that NFLX could raise their monthly streaming price of $8/month if they desired, but Hastings is much more interested in bringing new subs into the fold than showing better profitability. Remember Bezos a decade ago when it was all about growth, growth, growth and no concern for short term profits?

If I am correct and NFLX is the new AMZN from a short term trading perspective it probably won’t be as good a trading vehicle. AMZN is not a particularly good intra-day trading stock although it offers good swing setups. AMZN isn’t a “momo stock” like GMCR FSLR and NFLX. Those stocks have momentum funds piling in and out often creating amazing intra-day risk/reward trading opportunities. Without checking I would be surprised if AMZN had a beta much higher than 1. Its ATR is about 60% of NFLX despite being priced 20% higher. Momo funds love steady growth or accelerating growth. NFLX appears to have decelerating growth. This should cause momo funds to exit. But if there are others prepared to step in because of a longer term story NFLX price will continue to consolidate above 200 and eventually move to 300 and higher.

After NFLX released its unimpressive earnings report today it sold off on very heavy volume to 232. It eventually bounced on much lower volume closing in the after hours around 251.50. I would speculate that some momentum players were sellers in the after hours and other funds who believe in the much longer term story were scooping up shares. I saw this pattern repeatedly in AMZN from 2008 to 2011. Tomorrow I will be a buyer of NFLX if it supports at either 252 or 248. Below 248 I could see it dropping out to 240.

nflx after hours 5 minute july 22nd

The Netflix weekly chart

netflix weekly

Steven Spencer is the co-founder of SMB Capital and SMB University and has traded professionally for 17 years. His email is [email protected].

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One Comment on “NFLX is the New AMZN?”

  1. Another possible angle.
    Amzn’s Lovefilm seems to be struggling. Sign for me was sending pretty girls door to door canvasing for subscribers (here in UK). Maybe NLX could become part of Amazon stable sometime. Just guessin’ not tradin’

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