Why Am I Shorting Apple? Check Out These Charts
I continue to get a lot of pushback from my Apple (AAPL) short.
Apple is on my Best Ideas List (short).
Shorting More Apple
I'm Not Totally Banking on Bank of America's 3Q Results
Bank of America (BAC) released third-quarter earnings this morning that market watchers widely heralded as an impressive beat and one of the best "relative" profit reports so far for money-center banks.
My take: I'm still upbeat about BAC's long-term outlook, but I believe today's optimistic observations aren't entirely accurate. Frankly, the bank's quality of earnings disappointed me a bit.
Yes, the report was a beat -- but a number of nonrecurring factors contributed to BAC's headline gain. Comparing apples to apples, results came in slightly under Wall Street expectations.
Note that the reported $0.37 earnings per share included:
- A securities gain ($0.02 per share)
- DVA gain (another $0.02 per share)
- A $0.03-per-share gain on the sale of consumer loans
- An MSR profit of $0.01 per share
- A lower effective tax rate ($0.02 per share)
- A loss on a U.K. insurance provision ($0.02 a share)
Factor in all of these extraordinary items and you get $0.30-per-share earnings -- several cents below consensus estimates.
Now, it's true that on a line basis, net interest income met expectations and trading results were a slight beat as the equity performed well. Net chargeoffs were also better than projected, while a release of reserves benefited then bottom line by a penny a share.
And on the all-important expense side, costs remained well under control and legal was contained (a key part of my bullish-bank thesis). Continued progress on the cost front should provide BAC with downside protection, but a stronger recovery to profits will depend on a rise in interest rates and an improving net-interest margin.
Another positive: BAC's capital position is improving, but still remains below that of its peers. Finally, the share price relative to tangible book value is another attractive feature to the stock.
Reported EPS (including nonrecurring items) should total about $1.42 for 2015, but move back down to $1.28 when adjusted for nonrecurring items. To me, $1.50 EPS also looks good for 2016 and $1.65 seems reasonable for 2017 -- but as previously mentioned, much will depend on interest rates going up.
The Bottom Line
But I think BAC's near-term price appreciation is limited by the wobbly domestic economy, a likely slow rise in interest rates and the need to recognize that the bank's earnings quality is less than BAC's "cheerleaders" have described.
My 12-month price target on the stock is now around $17 to $18 (about 12% above yesterday's $15.64 close). That's slightly less than I previously expected, due to what I see as BAC's lower near-term "earnings power."
Looking out several years, a low to mid-$20s price target is possible -- but we'll have to be patient over the next six to 12 months.
The biggest worry to me is that NFLX produces no free cash flow. No one disputes that there hasn't been any free cash flow at Netflix, and at the end of the day, former CBS head Mel Karmazin put it best when he once said: "It's the free cash flow, stupid!"
But thanks to options issuance, Netflix's share count has nonetheless risen by 9% over the last 11 quarters. Meanwhile, interest expenses have increased by over 6x.
Given its elevated share price and rising cash burn, Netflix will probably have to sell some more equity now or by early 2016. I think it will do so -- and sooner than later.
Will there be free cash flow at any point of time?
Well, free cash flow is a function of revenue growth, margin growth and spending (which in Netflix's case mostly involves buying or producing content).
Let's look at each:
Revenues are growing at about a 23% rate, but Netflix is no Twitter (TWTR) or Facebook (FB) . It's not clear how much NFLX's unit pricing can rise. But to Netflix's credit, its products clearly represent great value propositions.
Will content costs stabilize, or fall? A decline seems unlikely to me, as management says the thing that draws in subscribers is proprietary content. Many people are demanding it, making a drop in the unit cost of production unlikely.
Netflix controls this and has clearly been willing to spend money. Will this continue?
Beware of Subscription-Based Firms
Another thing to consider: Subscription-based companies can be dangerous for investors. Two examples:
- AOL. The market focused on subscription numbers, which AOL delivered by adding low- or no-revenue subs.
- Comp-U-Card (eventually bought by Cendant). This discount-shopping service always made its subscriber-count goals in the 1990s by finding lower-quality subs via credit-card promotions. But once they signed up, many of these subs got rejected by the credit extenders. This would take a while, but the company eventually had to take chargebacks to reverse the revenues that it booked. The problem (which federal prosecutors uncovered through auditor cooperation) was that the firm never recorded these chargebacks on its public books.
As for Netflix, the key question to ask is: "What is the company's market penetration?" It's currently over 40% and still growing, but it seems clear that market saturation is with us -- especially with competition increasing.
On the subject of content amortization (when it's not "According to Hoyle"), a company can lose big.
Carolco and Cannon come to mind. How much Marco Polo is on the books? How fast is Beast of All Nations flowing through the income statements? No one knows for sure. This might not be a problem -- but if it is, it's a big one.
But despite all of this, Netflix has roughly a $45 billion market capitalization as of today. From my perch, that makes the company dramatically overvalued.