New trade: Long Netflix (NFLX)/Short Blue Nile(NILE)
Last week, I posted my opinion on Amazon and how it might lose a lot of ground when the Apple Tablet comes out. I had signaled I might be trading on this stock in today’s new trade. That is not happening after all. I did spent a lot of time looking into Amazon’s valuation and still think it’s expensive. But going short on a stock with so much momentum is dangerous and right now it does not sound like the right strategy.So there I was looking for another trade and Blue Nile stuck out because of its very high P/E ratio. Now I have been burned by Blue Nile in the past so I took extra diligence this time around but I do feel comfortable with the position, mostly based on valuation. Blue Nile has been riding high for a long time now despite failing to deliver on expectations many times in past quarters.
Take a look comparing the sales/revenue growth of Blue Nile (NILE) and Netflix (NFLX) and you might see what I mean. I would expect both companies to trade at similar earning ratios yet it is far from being the case. Netflix has huge momentum and its recent deal with Nintento which will allow Wii users to stream Netflix videos is yet another sign of growth to come. Streaming Netflix videos are already available on Sony’s Playstation 3, Microsoft’s Xbox, as well as many web-enabled tv’s, Blu-Ray devices and more.
Quarterly sales growth (%)
| CQ1 2008 | CQ2 2008 | CQ3 2008 | CQ4 2008 | CQ1 2009 | CQ2 2009 | CQ3 2009 | |
|---|---|---|---|---|---|---|---|
| BLUE NILE INC | 3.76 | 2.24 | (2.94) | (23.34) | (11.43) | (5.23) | 2.40 |
| NETFLIX INC | 6.83 | 11.17 | 16.09 | 18.93 | 20.82 | 21.00 | 23.98 |
Annual sales growth (%)
| CY1 2003 | CY1 2004 | CY1 2005 | CY1 2006 | CY1 2007 | CY1 2008 | |
|---|---|---|---|---|---|---|
| BLUE NILE INC | 78.72 | 31.30 | 20.05 | 23.83 | 26.90 | (7.50) |
| NETFLIX INC | 78.16 | 83.88 | 36.28 | 46.09 | 20.94 | 13.22 |
Based on latest estimates, Blue Nile’s PE ratio is almost twice that of Netflix, incredible given the fact that these companies are both in high growth mode. One of reasons why Netflix’s stock has been suffering is because of competition and possibilities that it could lose some studios movies. For example, rumors are that Disney is advanced in negotiations with Liberty Media Corp (LSTZA) to gain exclusive streaming rights to its movies. And with Redbox, Blockbuster, Apple, Youtube, Hulu and others fighting for content, the battle is on. But Netflix does have a good position and there is no reason to believe that these concerns will affect the company’s results too much in the coming months.And finally, to complete the analysis, take a look at the graphs of both companies:
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Thanks… it is interesting to read your perspective on Netflix – I really appreciate your focus on sales… to me, revenues are critical – far more than eps.
For this trade: opening prices:
NFLX: 50.95
NILE: 58.41