Netflix

Thesis: (Please see the Details section for explanations of each bullet point below)

• Expectations on Wall Street are extremely high, as Netflix gave up 20% following days after its 1Q earnings update.

• With high 2Q expectations, investors may be disappointed again with lower gross margins and a higher churn rate than expected. To add to this, competition is finally picking up with Blockbuster and Walmart entering the market.

• On the side, short interest has increased and insiders have begun selling their shares.

• Lastly, investors may be missing the large picture of Netflix’s true market potential in the long run.

Background:

• Launched in 1998, Netflix is the world’s largest online movie retail service.

• For a set monthly fee of $21.99, subscribers can rent as many DVDs as they want, with three movies out at a time and keep them for as long as they like.

• The company now operates 24 shipping centers in the United States and can reach 80% of its customers with 1 day delivery.

• The company grew revenues by 80% to $100.8 million in 1Q, and has 1.932 million subscribers and 760,000 new trial subscribers, an increase of 82% year-over-year.

Details:

• Expectations on Wall Street are extremely high as evidenced by the 80% STRONG BUY/BUY ratings. (10% HOLD, 20% STRONG SELL)

o Stock fell over 20% following days after 1Q earnings update.

 Company reported larger 1Q loss (11 cents a share) and gross margin 43.6% in low end of guidance.

 Company