Microsoft (NASDAQ: MSFT), a competitor of IBM (NYSE: IBM) and Google (NASDAQ: GOOG), will report its earnings for the fourth quarter on Thursday. According to Trey Thoelcke's earnings summary, the software giant will be expected to produce sales of about $15 billion on earnings per share of 47 cents. These numbers would represent double-digit growth rates for each metric.
According to this estimates page at AOL Finance, Microsoft has cultivated a reputation for being reliable when it comes to delivering on Wall Street expectations. It certainly has the assets to keep this trend going. The company's operating-system monopoly, as well as its incredible success with the Office suite of products, guarantees a steady stream of cash flow and bottom-line predictability. Other investments, such as the Xbox 360 and the company's various Internet properties, aren't as guaranteed. In fact, Microsoft has engaged a very strange battle (strange to me and others, at least) to buy Yahoo! (NASDAQ: YHOO) to bolster its future prospects on the 'net.
So, here's what investors should be looking for. I will be very interested in what management has to say about its thoughts regarding Yahoo! and its utility for Microsoft. Is it an absolute necessity? I doubt it, and I really do hope that shareholders will finally get some closure on this subject. The best thing would be for Microsoft to announce that it is done with the portal. And in terms of the Xbox 360, I would be interested in hearing any new marketing strategies being readied for the holiday season and if the current recessionary environment will have any effect on sales. Microsoft recently reduced the price for one Xbox 360 model as a way of increasing that system's value proposition in relation to the Sony (NYSE: SNE) PlayStation 3 and the Nintendo (OTC: NTDOY) Wii. The company also has entered partnerships with General Electric's (NYSE: GE) NBC Universal and Netflix (NASDAQ: NFLX), according to Variety, to make its Xbox Live asset even more attractive to users looking for cool content such as movies and TV shows.
After hitting a one-year low of $15.62 in July, the stock hit a one-year high of $40.90 in April. This morning, NFLX opened at $30.24. So far today the stock has hit a low of $29.81 and a high of $31.12. As of 12:40, NFLX is trading at $30.71, down 0.41 (-1.3%). The chart for NFLX looks bearish and steady.
For a bearish hedged play on this stock, I would consider a September bear-call credit spread above the $42.50 range. A bear-call credit spread is an options position that combines the purchase and sale of call options to hedge risk in case the stock doesn't do what you think but still leverage nice returns. For this particular trade, we will make a 6.4% return in three months as long as NFLX is below $42.50 at September expiration. Netflix would have to rise by more than 9% before we would start to lose money. Learn more about this type of trade here.
NFLX hasn't been above $41 at all in the past year and has shown resistance around $32.50 recently. This trade could be risky if the company's earnings (due out in mid-July) are a positive surprise, but even if that happens, this position could be protected by resistance NFLX might find just above $40, where the stock topped out in April.
DISCLOSURE: Mr. Archer owns and/or controls diversified portfolios of long and short stock and option positions that may include holdings in companies he writes about. At publication time, Brent neither owns nor controls positions in NFLX.
MOST NOTEWORTHY: Progressive, Netflix and Public Service Enterprise Group were today's noteworthy upgrades:
Wachovia upgraded Progressive (NYSE: PGR) to Market Perform from Underperform based on modest signs of improvement in underwriting trends.
Lehman upgraded Netflix (NASDAQ: NFLX) to Overweight from Equal Weight based on strong core trends and a potential announcement of digital service partners into its May 28 investor day.
Credit Suisse upgraded Public Service Enterprise Group (NYSE: PEG) to Outperform from Neutral based on earnings growth through utility investment, valuation, upside from U.S. CO2 policy.
OTHER UPGRADES:
Precision Drilling (NYSE: PDS) was raised to Outperform from Sector Perform at RBC Capital.
Hertz Global (NYSE: HTZ) was upgraded at Soleil to Buy from Hold.
Calyon upgraded Foundation Coal (NYSE: FCL) and Arch Coal (ACI) to Add from Neutral.
Blockbuster (NYSE: BBI) announced first-quarter earnings on Thursday, and while it beat the market's expectations, I can't say I'm terribly excited. Revenues decreased a little over 5% to $1.4 billion. Net income from continuing operations came in at $0.21 per diluted share. Briefing.com says that this performance was $0.06 better than Wall Street's average call. Revenues, however, missed expectations.
Why am I not excited about the performance here? I mean, not only did the bottom line trounce the wizards of Wall Street, but domestic comps increased 2.9%. Well, for one thing, the cash flow was nonexistent. Both operational and free cash-flow were negative; granted, the company used a lot less cash this time for operations, and the deficit in terms of free cash was much better, but still, I don't see any positive green.
Plus, there's just the general idea of Blockbuster itself. My feelings haven't changed since I last wrote about the movie-rental business and its earnings. I still believe that Netflix (NASDAQ: NFLX) and video-on-demand limit the upside potential of the company's long-term prospects (perhaps I shouldn't just say limit; maybe threaten is better terminology, who knows).
This post is part of our Battle of the Brands feature. Let us know which brand you prefer, and check out other Battle of the Brands posts.
Way back when, the movie-rental wars were fought between the neighborhood video stores (which had limited availability) and the superchain Blockbuster (NYSE: BBI) (which had limited availability except for the Die Hard series). Then, Netflix (NASDAQ: NFLX) came along with an amazing business model. Set up an account online, build a mammoth list of movies (from tens of thousands available), receive a few in the mail and send them back when you're done -- no late fees, but you only got new movies when you sent old ones back.
At the time, Blockbuster -- and many consumers -- didn't think it would work. First of all, you had to wait a day or two to get new movies; and second of all, who was going to want to deal with sending movies back in the mail? I mean, gosh. Well, eventually, Blockbuster caved and started the same kind of service. When you compare the two, however, which one takes the cake?
What Netlix Offers: For $16.99, you receive three DVDs in the mail. These movies come from the top of the personliazed list you create on the Netflix site. Delivery times vary, but local distribution centers can usually get them to you in two days. You can keep these DVDs as long as you want; but, if you never return them you never get anything new. Which is a real bummer when I Am Legend is gathering dust on your TV set. After you've watched one, or more, send it back in the provided postage-paid envelope. Within a few days, your next movie arrives in the mail. As of now, Netflix offers a total of nine (9) membership plans, from one-at-a-time to eignt-at-a-time. You can also purchase DVDs through the site, in addition to watching certain movies for free.
It's easy to understand why Blockbuster's (NYSE: BBI) out-of-nowhere bid for Circuit City (NYSE: CC) has been greeted with such skepticism: it's one of the most patently moronic business stories in recent months. And given the subprime mess, that's saying a lot.
The New York Times quotes a number of analysts, all of whom expressed substantial skepticism about the Circuit City deal. Most just don't see the point. Some worry that such a large deal will distract Blockbuster management from the task of restructuring its struggling core business.
Lehman Brothers analyst Douglas Anmuth has a creative take on it, pointing out that Netflix (NASDAQ: NFLX) could be the ultimate beneficiary of the deal: "The extensive use of both financial and management resources by Blockbuster throughout this process could be positive for Netflix as Netflix continues to focus on growing its subscriber base."
I'm not so sure about that, but I would look at it this way: how confident can Blockbuster be about its future as a stand-alone company if it's trying to pour its resources into such a bizarre acquisition?
Carl Icahn has said he is willing to step in as the financier of last resort if no one else will finance the deal, which seems like a good bet. Given the status of the credit markets, I can't see any bank rushing in to finance this universally maligned deal.
But questions remain about Icahn's offer. What are the terms? The publicly available details are vague.
Whether the deal will get done is anyone's guess. I'll leave Circuit City to the arbitrageurs, but I'd stay away from Blockbuster. This drunken-sailor grabbing the arm of another drunken sailor bid looks desperate -- and may indicate that Blockbuster's management is far less confident about its future with or without Circuit City than it's been letting on.
The drug maker posted net income of $3.3 billion, or $1.52 per share, for the January-March period, up from $1.7 billion, or 78 cents a share, a year ago. Excluding one-time items, Merck earned 89 cents per share, beating by three cents the forecast of analysts surveyed by Thomson Financial.
Revenues totaled $5.82 billion, up 1% from $5.77 billion in the first three months of 2007, but below analysts' expectations of $6.11 billion. The company attributed the slow sales growth to the weak U.S. dollar.
Merck shares fell Monday 13 cents, to close at $39.63. Shares are down 23% in the past year.
Netflix (NYSE: NFLX), a provider of DVD movie rentals, closed at $38.17 Monday.
NFLX April call option implied volatility is at 65; puts are at 78, above its 26-week average of 52 according to Track Data, suggesting larger price movement. Put prices are elevated because NFLX is difficult to borrow.
I like to check out stocks that are at or near a 52-week high in a tough market. Netflix (NASDAQ: NFLX) is one of them. Not only is the stock near a 52-week high right now, but it is up today almost 3% by nearly a buck.
Netflix is a very interesting company -- it has done extremely well with its DVD-by-mail subscription model, and it has offered a lot of competition for Blockbuster (NYSE: BBI). It's got great brand equity, the company's stock seems to be working -- why not go with it? In fact, Larry Schutts recently talked about how the stock was in bullish-flag mode. (By the way, I recently discussed my negative feelings about Blockbuster.)
The only problem here is that the market has been so volatile that my gut tells me many 52-week-high-stocks might be dangerous. In an upward-trending market, they might work, but in our current bear environment, I'm not so sure. Plus, I've been burned recently by some badly-timed purchases. So, while I have been watching Netflix, I'm a bit sheepish about getting in at the moment. A pullback will make this one much more interesting. Yes, many technical traders will tell me that the trend is a friend -- it is oftentimes. And I do have to say that this is one strong stock that almost got me to enter in near the high -- but I resisted, and I will continue to wait this one out.
Steven Mallas owns none of the companies mentioned here.
Movie-rental business Blockbuster (NYSE: BBI) reported earnings for the fourth quarter yesterday. They weren't bad; while the top line only managed an increase of just under 4%, net income on an adjusted basis more than doubled to 26 cents per share. For the full fiscal year, revenue was essentially flat, and the adjusted net loss widened to 71 cents per share versus a loss of 1 cent per share in the previous fiscal year. Those numbers, it seems, aren't so good.
And neither are the stats behind the flow of the green stuff. Operational cash flow declined for the quarter and was negative for the year. Free cash flow was flat for the quarter and negative for the year. In the previous year, both cash from operations and free cash flow were positive.
What do I think of Blockbuster? Not much. It's a competitor of Netflix (Nasdaq: NFLX), and it also competes against video-on-demand and pay-per-view services offered by cable businesses such as Comcast (Nasdaq: CMCSA). I know Blockbuster is trying to turn itself around, attempting to cut costs, restructure, and find its way in this era of new content-distribution models, but I just don't have strong confidence in its potential for long-term growth. Heck, I haven't stepped foot in a Blockbuster in a long time. Know why? There aren't any around me, and that wasn't the case many years ago. I actually use Redbox for my rental needs these days.
Blockbuster may have beaten estimates, but that doesn't mean I'm a believer. Maybe it will indeed turn around in the future, but I'll let other investors take their chances with this low-priced equity.
Steven Mallas owns none of the companies mentioned here.
Netflix (NASDAQ: NFLX) is the world's largest online movie rental service, providing more than seven million subscribers access to more than 90,000 DVD titles via U.S. mail delivery. The firm also has a growing library of more than 7,000 choices that can be watched instantly on customer PCs. Netflix does not have due dates/late fees and it employs user ratings to predict individual preferences and make movie recommendations. The firm has regional distribution centers throughout the United States. Blockbuster (NYSE: BBI) is a major competitor.
Investors were pleased last week, when Netflix guided Q1 EPS to 15-22 cents and Q1 revenues to $324-$328 million. Analysts had been looking for 20 cents and $325.18 million. Management also guided FY08 EPS to $1.18-$1.30 ($1.17 consensus) and FY08 revenues to $1.34-$1.39 billion ($1.33B consensus). The company's estimate of Q1 ending subscribers was boosted from 7.85-8.05 million to 8.16-8.26 million. The estimate of FY08 ending subscribers was raised from 8.4-8.9 million to 8.9-9.5 million.
Netflix, Inc. (NASDAQ: NFLX) shares are trading higher this morning after the company announced it expects 1st-quarter net income between 15 and 22 cents per share, up from a previously predicted profit of 13 to 21 cents per share. The change came after NFLX boosted its anticipated subscriber growth for the quarter to 8.16 to 8.26 million, up from 7.85 to 8.05 million. NFLX also upped its fiscal-2008 earnings estimate to $324 to $328 million, up from a range of $323 to $328 million. If you think that the company won't fall by too much in the coming months, then now could be a good time to look at a bullish hedged trade on NFLX.
After hitting a one-year low of $15.62 in July, the stock has hit a new one-year high today. NFLX opened this morning at $30.50 and has so far today hit a low of $30.00 and a high of $31.60. As of 10:35, NFLX is trading at $31.31, up $2.30 (7.9%). The chart for NFLX looks bullish and steady.
For a bullish hedged play on this stock, I would consider a June bull-put credit spread below the $20 range. A bull-put credit spread is an options position that combines the purchase and sale of put options to hedge risk in case the stock doesn't do what you think but still leverage nice returns. For this particular trade, we will make a 4.2% return in just four months as long as NFLX is above $20 at June expiration. Netflix would have to fall by more than 36% before we would start to lose money.
In the tech world, the belief is that innovation is mostly about creating great systems and solutions. Yet, when you look at some of the top growth companies – such as Netflix (NASDAQ: NFLX), Salesforce.com (NYSE: CRM), and ZipCar -- it is often "business model" innovation that's the big competitive advantage.
No doubt, this is something that Tien Tzuo understands. After all, he was the 11th employee at Salesforce.com and became the company's Chief Strategy Officer. Basically, he helped to evolve a disruptive business model; that is, selling software on a subscription basis.
"Buying something is an old-economy way of doing business," said Tzuo, in an interview with me. "Why pay a fixed price for something?"
It's a good point. And yes, he has a new company, called Zuora, which plans to be the platform to help companies provide rentals and subscription services. "It's not easy thing to do," said Tzuo. "You need to deal with different versions of a product, different pricing levels, and also potentially many customers. It can be tough to manage."
The good news is that Tzuo has assembled a strong team, with top-notch people from places like Accenture (NYSE: ACN), WebEx, Salesforce.com and Oracle (NASDAQ: ORCL). He was also able to snag capital from Benchmark.
"It was a great run at Salesforce.com," said Tzuo. "The company is quickly approaching $1 billion in revenues. Now, I want to see if we can take Zuora to a billion."
Netflix Inc. (NASDAQ: NFLX) CEO Reed Hastings has a plan to keep the company relevant given that the DVD-by mail business will become obsolete sooner or later as video content delivery via the internet becomes more widespread.
The company is partnering with LG Electronics to develop a set-top box that will allow you to stream movies from the internet straight to your television -- look for it in the second half of this year.
It's an exciting development and strong evidence that Hastings realizes that company's current bread and butter, mailing people movies, isn't the future. But I'm skeptical about whether Netflix shareholders will reap the rewards. The problem is that I can't figure out what Netflix's competitive advantage is in entering a new space. Sure, it can invest in new technology -- but so can everyone else and a lot of other companies are. Just as Blockbuster's (NYSE: BBI) brick-and-mortar presence didn't mean they could make money doing DVDs by mail, I don't think Netflix will be any better positioned than a lot of other well-funded companies looking to be on the cutting edge of the next generation of movie delivery.
True -- the company has a strong library of titles already available for streaming, but other companies willing to spend the money probably will be able to duplicate that.
Microsoft (NASDAQ: MSFT), a competitor of IBM (NYSE: IBM) and Google (NASDAQ: GOOG), will report its earnings for the fourth quarter on Thursday. According to Trey Thoelcke's earnings summary, the software giant will be expected to produce sales of about $15 billion on earnings per share of 47 cents. These numbers would represent double-digit growth rates for each metric. 
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This post is part of our 
Here are some highlights from this past week's 
Some good news: 
Netflix
Movie-rental business 
In the tech world, the belief is that innovation is mostly about creating great systems and solutions. Yet, when you look at some of the top growth companies – such as 
and 
. He also operates 
Comfort Zone Investing: Oil's down, which is a start, but not good enough
Stocks have their worst week in six years
Why haven't the Republicans said much about the economy?
