Summary of Investment Thesis

Netflix (NFLX) has a strong business operation that is highly successful and has driven strong revenue, EPS, and cash flow growth over the past several years. We expect this to continue as Netflix expands its share of the home rental market. We also believe that the company’s expanding offerings of streaming content will enhance profitability by potentially lowering churn (currently around 4.2%), subscriber acquisition cost, as well as fulfillment expenses. While we are positive on the outlook for the company we believe that near-term growth potential, we do think this company is overvalued.

The old tech bellwethers of the 1990s failed to meet the unrealistic expectations investors had of them. The stocks have fared poorly since the market peaked in 2000, but revenues and earnings have generally grown reasonably well. The result is that these stocks, so overpriced a decade ago, can now be considered value stocks. In addition to having low P/E ratios and decent growth, most of these companies have strong balance sheets with plenty of cash.

There is now a new crop of tech favorites. Many of them are expected to profit from the rise of “cloud” computing, and no doubt some of them will. But the lesson from a decade ago is that the big winners are hard to spot ahead of time and if they are all priced for perfection, the safest bet is probably to stay away from them altogether, or perhaps even take positions against them.

By Leena Rao

AOL CEO Tim Armstrong hinted that this was coming, but this morning Google (GOOG) and AOL announced a five-year renewal of the search deal between the two companies. Google will continue to power search across AOL’s content network and properties. The partnership will be expanded to include mobile search and YouTube.