Netflix Inc. (NFLX)

Big admirer of how the company is set up. Growth is phenomenal, especially in China and India. Only challenge is the valuation. Going to be a good company for a long time. The risk is constantly betting on it beating every quarter. If it doesn’t, it’s a good time to add. (Analysts’ price target is $371.08.)

Reminds him of Nortel. Netflix is worth only 25% of its current share price. It'll face competition from Disney. As long as there's a bull market, this stock will continue to do well. It suffers enormous volatility--can you stomach that?

Covered call selling DEC 360 calls. More volatile stock. Premiums are three times what you would get from an Apple (AAPL-Q) option. They missed because of the World Cup. He wouldn’t be surprised if they pick up in the next quarters.

There recent earnings indicated their growth in subscribers is slowing. This is an example where the stock is priced for perfection – any slip up and the stock can plunge. Management has done an outstanding job to date. They are now spending on content and this impresses him how they remain profitable.

Down 15% after-hours yesterday because of a big miss in subscribers. But the point behind Netflix is that they are cash-challenged which amounts to a lot of risk. Programming costs a lot of money. Don't worry about a one-time
subscription drop. Look at their cash.

He has trouble with the valuation. Their new content spend will exceed that of Disney, with the expectation of $10 billion to be spent in the next year. Their subscriber fees will continue to do well; however, competition is on the way with Apple, Google and Amazon.

This has been a huge success story but if an investor has been holding it for a while, it is wise to take some of the profits off the table. The questioner wanted to know what other FAANG stock to invest in with money taken from the sale of Netflix shares. Baskin owns Apple, Google and Facebook. He thinks Apple is the cheapest one and Google is the most interesting one because there are so many promising projects inside Google. It is like buying a profitable advertising business and getting a handful of lottery tickets as well, for free.

At this point in the cycle, it is at 50-60 times earnings. If you think the cycle will continue, you may switch into a lower valuation holding. He might recommend the IGV-US ETF (a North American software ETF) to take some of the risk off.

Valuation has always been the Achilles hill for him on this type of companies. Trading at 100 times forward earnings with 44% growth rate. But what if there is more competition? What happens to this growth rate? 125 M subscribers worldwide. More now outside the US than in the US. The profitability of the international market is questionable. They are negative net cash flow.

Short put. Write a September $300 put. You're obligated to buy at the strike price. If it doesn't get down to $300, then the option expires worthless and keep the $22/share (it closed at $322 today). Put cash aside or have credit on the side to buy the to stock. This is way to play NFLX on a pullback.

He wishes he owned it. There is some competition, e.g. AMZN-Q. NFLX-Q has an amazing business model and they are profitable. He can't get in as a value investor. They have done a great job, though.

He always thought it was too expensive and even today he feels that way. It had a great earnings report this week with record new subscriber rates. Trades at 70 times next year earnings.

Never own it. What prevented him from buying it is the valuation trading at about 107 times earnings. The amount of content spending concerns him as well. Disney (DIS-N) is pulling their content out.

Discipline is more important than chasing really high valuation stocks. It is in the bottom 2% on valuation and yet in the top 1% on momentum.

Still believes in it. It was the first streaming company and continues to improve while it expands globally. Its content continues to improve too. He loves HBO, for example, but Netflix is improving more. Comcast and Disney are fighting for market share, but Netflix is still winning. Add to your position.