3SOF

I've been thinking about this macro trend, from movie rental to movie download, for a long time, but Apple TV tells me the time is now (although I guess Apple TV will only work with iTunes, there are several other devices which allow any downloaded film to be watched on TV, like a Kiss DVD player, for example).

It is already possible to download videos from the internet and watch them in your television set, my friend and partner Ramsburg has been doing it for years. But now I see it becoming the mainstream.

HLIT's business description is:

Harmonic Inc. is a leading provider of versatile and high performance video solutions that enable service providers to efficiently deliver the next generation of broadcast and on-demand services including high definition, video-on-demand, network personal video recording and time-shifted TV. Cable, satellite, broadcast and telecom service providers can increase revenues and lower operational expenditures by using Harmonic's digital video, broadband optical access and software solutions to offer consumers the compelling and personalized viewing experience that is driving the business models of the future.

HLIT is the future.

NFLX is the past:

Netflix, Inc. operates as an online movie rental subscription service provider in the United States. It provides its subscribers access to a library of movie, television, and other filmed entertainment titles. As of December 31, 2005, the company provided approximately 4,200,000 subscribers access to a library of approximately 55,000 movies, television, and other filmed entertainment titles. Netflix was founded by Reed Hastings in 1997 and is headquartered in Los Gatos, California.

In the not so distant future, people will not be willing to wait for a DVD coming with the mail. They will download and instantly see it on TV.

Technically speaking, HLIT is bullish and NFLX is bearish:





HLIT had a strong quarter in Q3 2006 and the CFO said yesterday in a Needham presentation that Q4 will be the strongest of the year (and there's no seasonality). I particularly appreciated Q3, because gross margin rose from 43% to 50%, and we've been seeing that an expansion in gross margin is one of the most important factors in stocks about to explode in price. Since management says Q4 will be even better, and with the current macro trend, I'm a bull on the stock.

I know NFLX also has growing revenues and rising gross margin, but it is valued at 30 times next year's earnings, and I don't think that business will be around in three years time, at least not with the current business model.

For the following updates I'll separate this thread in two, because these are two different trades (although connected).

The trading plan is:

Buy 6.66% of capital in HLIT and short 6.66% of capital in NFLX.

In other words, a close above 8.30 would be bullish short term?!

Quote from: Se7en on January 12, 2007, 10:09:57 AM
In other words, a close above 8.30 would be bullish short term?!

Se7en,

The upside takeout of the 7.51 Right Shoulder is bullish, as long as HLIT trades above it.

It also was bullish to take out the 7.75 highs of the Left Shoulder.  That "shouldn't" happen, if the pattern is bearish, and it suggests that the resolution "should be" to the upside.

Any closes back below 7.75 and 7.51 (the highs of the shoulders), puts that bullish resolution in question.  We could go back to those numbers for a re-test though.  The 50DMA is at about 7.80, too.

Sorry, I put the wrong number on the chart, the high of the Head, which was 8.67, not 8.30, so HLIT needs to print 8.68 to take it out to the upside.

That would put a target of 10.29 IN PLAY.

Melf, The following is what made the stock move yesterday from Briefing.com.

Live In Play 


11-Jan-07
07:23  CMCSA Comcast: Appears likely to spend aggressively on Triple-Play land grab opportunities in 2007; ARRS and HLIT well positioned to benefit -   

Thomas Weisel believes CMCSA is likely to be an aggressive spender in CY07 based on: 1) their expectation for a 71% increase in Comcast Digital Voice net additions; 2) stated plans to ramp the co's HD/VOD offerings; 3) robust growth in data subscribers and traffic; 4) triple-play upgrades to the acquired Adelphia, TWC and Susquehanna properties; and 5) a ramping SMB initiative. Firm believes that ARRS and HLIT are likely beneficiaries of CMCSA's initiatives given their strong relationships with the operator. Firm notes that CMCSA expects to double its HD on-demand offering by YE07, viewing this capability as a competitive advantage over satellite operators, especially DTV. CMCSA ests that 3 mln businesses are within or near the co's service area, all of which are prime targets for the co's phone and data services and believe ARRS could see a meaningful piece of spending here based on its leadership in multi-line EMTAs and the capacity demands that would be placed on CMCSA's CMTS infrastructure.

LATER IN THE DAY YOU GET THE FOLLOWING

HLIT Harmonic: Expected DBS win a positive, but impact overestimated- Friedman Billings (8.07 +0.72) 

Friedman Billings notes the co announced it received a meaningful order for high definition encoders from a major direct broadcast satellite operator. The firm says they have long anticipated at least one H.D encoder win for Harmonic, and they view this news as a fundamental positive for the co. However, the firm continues to believe that the impact from this win on 2007 results is not as large as many expect and that actual results this year will underperform bullish expectations. The firm notes that this win does not affect their view on the co's 1H07 results, as they have "baked in" about $7 mln in incremental D.B.S business into their model. Firm reits Underperform and $5 tgt.

TODAYS NEWS:

12-Jan-07
07:23  HLIT Harmonic estimates raised at Thomas Weisel on suspected win at DISH (8.16 ) 

Thomas Weisel notes that at an investor conference on January 11, mgmt from HLIT indicated that the co had received a substantial MPEG-4 HD encoder order from a major North American satellite provider at the end of December. While management was not specific, the firm's industry checks indicate that HLIT has received an initial order from Echostar (DISH) for the rollout of local H.D., an opportunity that they believe could eventually reach roughly $50 mln and that was not in their previous $270 mln 2007 revenue estimate. Firm raises their 2007 rev est to $285 mln from $270 mln (consensus $274.5 mln). 

This is the 1st time I followed a short recommedation and I am a bit nervous. I have two questions:

1. For shorting in general, shall we have a target price? I imagine at some point, there is no point staying in a short position as the most you can make is only 100%. 

2. For a volatile stock like NFLX, is it prudent to hold the short position over its earning report? I am kind of fearful when I looked at the huge gap on its last earning back in October...

Quote from: realcoolhead on January 12, 2007, 03:32:47 PM
This is the 1st time I followed a short recommedation and I am a bit nervous. I have two questions:

1. For shorting in general, shall we have a target price? I imagine at some point, there is no point staying in a short position as the most you can make is only 100%. 

2. For a volatile stock like NFLX, is it prudent to hold the short position over its earning report? I am kind of fearful when I looked at the huge gap on its last earning back in October...

Your first question, it's possible to go over 100% on a short. For example, let's say you bought 100 shares of Netflix at 23.00, and it tanks after earnings, driving the price down to 5.00 (just bear with me!). Your sale price was $2300, and you covered for $500, a profit of $1800 on a $500 purchase, or 260%...

(Someone please correct me if I'm full of it)

QuoteYour first question, it's possible to go over 100% on a short. For example, let's say you bought 100 shares of Netflix at 23.00, and it tanks after earnings, driving the price down to 5.00 (just bear with me!). Your sale price was $2300, and you covered for $500, a profit of $1800 on a $500 purchase, or 260%...

(Someone please correct me if I'm full of it)

Hi nutsterrt, I also had that same doubt for years.

First, if you bought NFLX at $23 and sold at $5, as you wrote, you would lose 78% of your investment

But I understood you. If you sold 100 shares short of NFLX at $23, you sold a $2,300 value. When you buy the stock to cover your short position at $5, you pay $500.

The difference (or profit) is $2,300 - $500 = $1,800.

So, your initial investment was $2,300, your final capital was $2,300 + $1,800 =  $4,100.

The profit on your investment was $4,100/$2,300 = 78%.

The conclusion is: you can only make 100% of profit in a short sale of common shares, unless you leverage your capital or use margin.

There are five possible ways to make more than 100% profit from a declining stock, all of them include leverage:

1) Buy put options;
2) Buy put warrants (more common in European markets);
3) Sell call options short with leverage;
4) Sell single stock futures if available for that specific stock;
5) Sell the stock short using leverage or margin.

All of these strategies involve more than normal risk and I wouldn't recommend it to anybody. I believe shorting is a losers game over the long run.

NFLX's short (just selling common shares without leverage) is a short/medium term trade. I'll probably close it with about 30% profit if I have the chance to do it quickly.

Profits in Long or Short position are the same thing right?

(Short position) Let's say you sold short 100 shares of NFLX:
sold short NFLX at ---> $23 = $2,300
Buy to cover at -------> $5 = $500
Profit --> $2,300 - 500 = $1,800 or 78%


(Long position) bought 100 shares of NFLX:
Bought NFLX at ------> $5 = $500
Sold NFLX at ---------> $23 = $2,300
Profit --> -500 + (2,300) = $1,800 or 360%

Quote from: Terliso on January 12, 2007, 05:26:42 PM
Profits in Long or Short position are the same thing right?

(Short position) Let's say you sold short 100 shares of NFLX:
sold short NFLX at ---> $23 = $2,300
Buy to cover at -------> $5 = $500
Profit --> $2,300 - 500 = $1,800 or 78%


(Long position) bought 100 shares of NFLX:
Bought NFLX at ------> $5 = $500
Sold NFLX at ---------> $23 = $2,300
Profit --> -500 + (2,300) = $1,800 or 360%

Not at all, because in the short case your initial investment is $2,300 and in the long case your initial investment is $500.

In the short position you make $1,800 profit using $2,300 of capital, so 78% profit.

In the long position you make the same $1,800 profit, but on a percentage basis it is a 360% profit on your initial investment of $500.

If you were to invest the same $2,300 buying a stock at $5, you would buy 460 shares. If you sell those 460 shares at $23, your final capital is $10,580, so, again, you made 360% profit, which is the percentage rise from $5 to $23.

The difference between the short and the long case is the initial commitment of capital you need to make, and the profit you make is always:

Final Capital - Initial Capital = Profit in $ terms;
Final Capital/Initial Capital = Profit in % terms.

So, having $2,300 to invest, you make $8,280 if the stock you buy goes from $5 to $23. Yet, if you sell those $2,300 of shares short at $23 and buy to cover at $5, you make a $1,800 profit.

Right?

Quote from: David Randolph on January 12, 2007, 05:34:04 PM
If you were to invest the same $2,300 buying a stock at $5, you would buy 460 shares. If you sell those 460 shares at $23, your final capital is $10,580, so, again, you made 360% profit, which is the percentage rise from $5 to $23.

So, having $2,300 to invest, you make $8,280 if the stock you buy goes from $5 to $23. Yet, if you sell those $2,300 of shares short at $23 and buy to cover at $5, you make a $1,800 profit.

Ohh yeah, that's fair enough... thanks for clearing that up

Wow, that's a lot of replies on my question  Thanks.

I always had the thinking that shorting is always done on margin and will have to pay margin interest the minute you shorted. David's answer got me to do a bit googling, and found:

https://us.etrade.com/e/t/estation/help?id=1302000000#Understand4

So margin interest only begins at a point when there is not enough cash in the account to cover the short position. That makes sense.

This also explains the question of initial commiment for shorting a stock. Even though you can short $2300 with much less equity on hand, in order not to actually use the margin, you will need the full $2300 cash as colleteral, thus $2300 is "as if" the initial investment.

I like David's idea of covering at 30% profit. It is clearer using a dollar figure not a percentage figure to compare the potential of a short position and a long position: for a $2300 initial investment, a short position can at most net you $2300, whereas a long position can potentially give you much more profit than $2300. Hence there is no need to stay in a short position for too long.

NFLX is definitely in the clutches of a bear. Their battle with Blockbuster was at even when Wal Mart folded closing its mail DVD rental service. Now they are looking at Blockbuster's improvement and Hollywood Video becomes the suspect loser in the battle. Who will win the Blockbuster versus NFLX battle?

HLIT Investor presentation Jan. 11th of 2007 part 1 

presentation part 2 ( I am invested, nice CC and nice slides with useful investor information; link: http://www.wsw.com/webcast/needham16/hlit/)



cheers
Oliver