This is nuts, when does Netflix crash?

https://ftalphaville.ft.com/2018/03/09/1520612404000/This-is-nuts--when-does-Netflix-crash-/

Today, the numbers represent boundless optimism: a dozen times the $12bn of revenues reported last year, 120 times the profits it is expected to generate in this one. Fast forward, and estimates from analysts prepared to put a finger in the air for 2021 average out to forecast revenues of $27bn.

Are they, and the market, wrong?
Maybe it would be easier to share that confidence if Reed Hastings submitted to the sort of quarterly conference call suffered by less exalted chief executives, where questions from the crowd are allowed. The company prefers to pre-record polite conversation with chosen analysts.
It might be easier to believe in the growth story if 48m American households weren't already signed up for the delights of Stranger Things, and marketing spend wasn't growing faster than sales. It will jump to $2bn this year, from $1.3bn in 2017, which suggests winning customers is getting harder even if, like Netflix, we believe 700m households around the world are potential customers.
Buying into the dream would be easier if the company weren't also competing with Amazon, HBO and, in the not too distant future, Disney.
Spending of $8bn on content is planned for 2018. It would be easier to believe such costs were sustainable if the group wasn't funding itself through an accumulation of debt. That borrowing may be the part the market has overlooked, or even got wrong, but it makes Netflix the epitome of the boom we now enjoy.
The company has been burning cash for years, whether we judge it on operating cash flow or free cash flow. Netflix had to find $0.5bn every quarter last year, on the latter basis.
It borrows in the bond market to fund such spending, accumulating $6.5bn in debt, and likes to talk up a ratio of debt-to-market capitalisation as if it measures financial health rather than the weight of fairy dust sprinkled on the stock.
The debt is rated junk, four notches below investment grade. Were credit markets to close, as they periodically do to weaker borrowers in moments of strife, Nextflix would be shut out.
It has $2.8bn of cash on hand, and another $0.5bn credit line, so it could wait out any reluctance by investors to lend. Maturities are evenly spread into the future.
There's a circularity to the confidence game though. On the way up free spending on TV stars, writers, and producers is treated like investment. Stock market fans buy into the story of conquest, while debt investors and rating agencies tell themselves subscriber growth will eventually take care of the lack of cash.
A broader market upset could break that spell. Forced to preserve cash, prompting a slowdown in the pace of growth, and investors might focus more on the burn rate and the company's substantial content liabilities. The group has $7.5bn of these on the balance sheet, and another $10bn of such commitments off it.
In all, contractual commitments come to $28bn, according to this table in the recent 10-K filing:

On top of that are another $3bn to $5bn of estimated commitments for unknown titles in the next three years, for instance “traditional film output deals, or certain TV series license agreements where the number of seasons to be aired is unknown”. Those costs are largely expected to fall due in 2019 and 2020.
Of course, much of these obligations will come under operating costs, and Netflix can reasonably point to large content obligations elsewhere. At the end of last year Disney listed $48bn of commitments, almost all sports related for ESPN, out of $92bn of total commitments.
Set against their respective valuations, Netflix's obligations don't look so bad. With net debt it has an enterprise value of $147bn, to Disney's $182bn.
Traditionalists, however, might prefer some harder numbers. The Mouse empire took in $55bn in sales last year, and produced $9bn of free cash flow.
Focus on the Disney valuation, however, because it gets at the question of what Netflix investors are playing for.
Imagine in a decade Netflix has grown such that it has $55bn in revenues. Also imagine it can grow subscription fees as if they were for a college education, even though it will compete against Amazon, iTunes, Spotify and whatever else comes along for entertainment spend. If the average household were to pay $15 per month, up from $9.43 today, Netflix will need 305m paying households to get there.
It could, sure. We can also argue about details of business structures, predictability of subscriptions and whether Netflix will still be growing.
Yet, if it does everything right from here, what is the upside for enthusiastic shareholders?
A decade of incredible growth would take Netflix to something like the size, heft and cultural influence of Disney today, which the market thinks is only about a quarter more valuable than the TV-streaming trailblazer.
Those feel like the wrong odds.

Why the bitcoin revolution is emptying store shelves and making gamers mad

https://www.sfchronicle.com/business/article/Why-the-bitcoin-revolution-is-emptying-store-12534993.php

and making gamers mad

By Benny Evangelista

January 29, 2018 Updated: January 30, 2018 6:00am

• 

Photo: Santiago Mejia, The Chronicle

Image 1 of 2

Sam Duong moves stock at Central Computers, where cryptocurrency miners are purchasing all the high-end graphics processor units they can find.

At a computer store in downtown San Francisco, a five-shelf cabinet normally filled with graphics cards — popular add-ons that soup up PCs — stands bare.
It’s a strange but true sign that the cryptocurrency craze is bleeding into the real world — with speculators taxing electrical grids and silicon supplies in their quest to make digital money.

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“We need as many as we can find,” said Donnie Williams, 36, a Novato resident, as he and his business partner David Miller, 47, of Pleasanton, paid $1,000 for the only graphics card in stock one day last week at Central Computers near the Moscone Center. The two needed the card to add to five they had already installed in their computing rig inside Miller’s home.
People who help mine, or create, bitcoin and other cryptocurrencies are snapping up the processors as the currencies have soared in value. Whenever people buy and sell these digital coins, the transaction is verified through a series of complex mathematical computations. Whoever does that math earns some currency themselves. The high-end chips in graphics cards process those computations faster, accelerating miners’ earnings.
The mining is also taxing real-world energy systems: The Energy Institute at UC Berkeley’s Haas School of Business notes studies that show bitcoin mining around the world is consuming more energy per year than the country of Bulgaria.
College students are using free dorm electricity to make a fortune. On Wednesday, Stanford University issued students a stern warning against using campus power or computers to mine cryptocurrency, reminding students, “Stanford resources must not be used for personal financial gain.”
The skyrocketing demand for graphics processors is good news for companies like Santa Clara’s Advanced Micro Devices and Nvidia, which make them. But shortages and price rises have angered other users, like video game enthusiasts, who rely on the cards to make sure the latest graphics-intensive games scream across their monitors.
Dan Sherman of St. Louis said he planned to build a new gaming computer, which he needed for his job as a video game commentator and streamer for an e-sports organization.
“It was super shocking to see the prices go up,” Sherman, 32, said in an email. “I was not expecting this at all. It’s really disappointing that I’ll have to wait to move forward with my plans, or maybe won’t get a chance to at all.”
The video game news site Kotaku has blamed miners for causing “the great graphics card shortage of 2018.”
“Gamers are resentful of miners,” said Craig Yeung, general manager of the six-store Central Computers chain, based in Santa Clara. His stores are capping sales at four per customer to try to keep some inventory available for regular customers, like businesses or video game players.
Caught by the shortage are engineering and architectural firms, which use increasingly sophisticated 3-D and virtual reality software for computer-aided design work. Video game and movie special-effects studios also rely on the graphics processor units inside high-end workstations.
But Yeung said he receives email from cryptocurrency miners around the world seeking as many graphics cards as they can get.

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The recent run-up in cryptocurrency prices — bitcoin is now worth $11,000, up from $1,000 a year ago though down from a recent peak near $20,000 — has created a gold-rush atmosphere for small-scale miners like Williams and Miller, who have spent about $12,000 on equipment in the last month to cash in on the cryptocurrency craze.
Typically, miners will connect several cards together to work as one custom-built machine, with a motherboard, cooling fans, power converters, monitor and software. The rig will run all day and all night, processing the complex transactions that combined, make up the community-run accounting system for transactions in bitcoin, Ethereum, ripple and other new currencies.
These rigs plug into an elaborate online ecosystem designed to keep decentralized cryptocurrency transactions honest. The miners play a vital role in verifying transactions. For their efforts — if their computers are fast enough to keep up — they are rewarded in cryptocurrency.
“For me, it’s like investing in stocks and gambling at the same time,” Miller said. “It’s got that excitement. Ever bet on a horse race? You root for your horse, if it comes in, it comes in. If it doesn’t …”
And so, the top-rated video graphics cards using processors made by Advanced Micro Devices and Nvidia are hard to find in stores, and the shortages have caused prices to rise. Miller and Williams, for example, bought an Nvidia GeForce GTX 1080 card that used to cost about $600, said Central Computers store manager Candy Kwong.
Because of the rush, Central Computers limits purchases to four cards per customer. Nvidia itself has placed a two-per-customer limit on orders online. Both Nvidia and AMD declined to comment for this story, citing SEC regulations requiring a “quiet period” before they release quarterly earnings reports.
Prices online for top-range AMD and Nvidia cards have almost doubled in the past two months, said Phillip Carmichael, founder of PCPartPicker.com, an Austin, Texas, company that tracks prices of parts for customers who build their own computers.
“Our users are certainly not happy with the current situation, but there’s not much to do right now besides wait it out,” Carmichael said in an email.
Eugene Chung, CEO of San Francisco’s Penrose Studios, said his startup relies on graphics cards to create virtual reality animation stories. He doesn’t see the shortages as having an immediate impact on his business, since capital costs can be spread out over time. But he does wonder whether rising graphics-card costs will affect his business in other ways. To run virtual reality headsets, consumers need PCs with powerful graphics cards. If those get more expensive, it could tamp down growth in the virtual reality market.
“My biggest concern is for consumers,” Chung said.
But it’s also hard to predict what will happen in the future because the cryptocurrency market “is very transitory,” said Gregory La Blanc, a lecturer at UC Berkeley’s Haas School of Business.
Small-scale miners like Miller and Williams have to contend with large-scale mining operations in places like China, Russia and Iceland, where electricity is cheaper and the cool climate keeps the chips from overheating, he said. The recent surge in bitcoin’s price — it reached $19,783 in mid-December before falling sharply — has drawn more people into the market despite tough competition.
“Ultimately, it sounds like the Gold Rush in California in the 1840s, when you could show up with a pickaxe and a pan and make money in the first couple of years,” La Blanc said. “But the big mining companies showed up with hydraulics and heavy-duty machinery and steam engines and put these little guys out of business fairly quickly.”
Such prospects are not putting off Rod Mohammed, 25, of Riverside, who dropped by Central Computers the day after Miller and Williams. The only GTX 1080 card in stock, which a clerk had placed in the otherwise barren graphics card section moments earlier, was already priced $50 higher.

Photo: Santiago Mejia, The Chronicle

Rod Mohammed views the last high-end graphics processing unit at the Central Computers store in South of Market.

He said he’d been scouring computer stores for those elusive cards: “Fry’s, Best Buy, I mean everywhere, and nobody’s got them.” Mohammed has built a rig with six graphics cards he bought last month, when they were $670 each.
“When I saw (the value of) bitcoin shoot from a thousand bucks to $20,000, I said, ‘I don’t want to miss this, I don’t want to be that guy who’s slapping himself in the face for not jumping in at the right time,’” he said. “And if you figure you can make over a thousand bucks a month extra profit, why not, right?”
Ultimately, he didn’t buy the lone card available. “One doesn’t do me any good, you’ve got to get six of these,” he said. “I don’t know why anyone would want to buy just one, unless they’re just gaming.”
Benny Evangelista is a San Francisco Chronicle staff writer. Email: bevangelista@sfchronicle.com Twitter: @ChronicleBenny
Bitcoin mining explained
A bitcoin is a digital token that you can send electronically to anyone in the world. A bitcoin is a type of cryptocurrency — the general term for any currency whose value derives from computer code rather than the backing of a physical good or government guarantee.
No single person or company runs the network on which bitcoin is exchanged. Instead, transactions are recorded by computers on a digital ledger. Because the transactions aren’t centrally stored, people have to verify them by running complex mathematical equations — essentially, solving a puzzle.
Solving the puzzle is known as “mining,” and it yields a prize in the form of more bitcoin, the reward for verifying transactions. The cost of mining is computing power; generally speaking, the more computing power a miner uses, the better the chance of solving the puzzle and getting the prize.
That computing power has a price — the cost of the hardware and the electricity to run it. Crescent Electric estimates that it costs $6,200 in California to mine one bitcoin, based on the current price of electricity in the state. A bitcoin is currently worth almost twice that, making for a nice profit margin.
The microprocessors in standard PCs aren’t as good at solving equations as the specialized processors found on graphics cards. By rigging graphics cards together, miners improve their odds.
— New York Times and Chronicle staff

Sheila Bair Sees the Seeds of Another Financial Crisis

https://www.barrons.com/articles/sheila-bair-sees-the-seeds-of-another-financial-crisis-1519916556Sheila Bair has demonstrated that she’s not afraid to be the lone person flagging potential problems. The former head of the Federal Deposit Insurance Corp. is best known for her early warnings about the subprime mortgage market, and she’s still spotting problems in the financial system.
Bair has spent much of her career in Washington, D.C., beginning as a staff member for Sen. Robert Dole, and has long been comfortable going against the consensus. In 1992, as a commissioner on the Commodity Futures Trading Commission, Bair was the sole dissenting vote against loosening rules for energy trading companies, arguing that it set a “dangerous precedent.” Less than a decade later, Enron’s collapse proved her right. During the financial crisis, Bair, appointed to lead the FDIC by President George W. Bush in 2006, clashed with other officials, as she pushed for loan modifications and argued against bailing out the big banks.
After leaving the FDIC in 2011, Bair spent two years as president of Washington College, a small liberal-arts school in Maryland, where she focused on another growing problem—student debt. Bair also has served as an advisor to many institutions, including the China Bank Regulatory Commission and the Pew Charitable Trust, where she headed the Systemic Risk Council, a nonpartisan group that aims to improve financial stability. She also serves on several corporate boards, including the state-owned Industrial and Commercial Bank of China, and Paxos, a blockchain start-up that operates a bitcoin exchange.
It’s a portfolio that gives her a good vantage point on the market’s most pressing issues. We spoke with Bair to hear her views on China’s large debt, trouble spots she sees in the U.S. financial system and economy, and what regulators should do about bitcoin.

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Barron’s: Investors have worried about whether China’s high debt is a risk to the global economy and financial stability. Is that a reasonable concern?
Bair: We look at their debt and wag our fingers and tsk, tsk. It is high. But they realize it is a threat to financial stability and are dealing with it. Last month, regulators took over privately held Anbang Insurance to keep it from collapsing. [Anbang is a conglomerate that had expanded aggressively overseas, acquiring hotels including the Waldorf Astoria in New York.] It is a sign they are continuing to crack down on reckless growth and excessive leverage.
What else is China doing to stabilize its financial system?
They need to reduce debt, increase transparency, and make sure banks stay on top of credit risk. The banks are very aware of credit quality and nonperforming loans. The words you hear are “prudence” and “sustainable growth,” and there is huge emphasis on risk management right now from bank leadership and regulators. They are also cracking down on wealth management products. That means more loans on bank balance sheets, because these products had previously been off balance sheets. But that’s a good thing because at least it’s transparent.
What questions do the Chinese most frequently ask you?
They are very focused on how Western investors look at them. There is confusion and trepidation about what the U.S. attitude is toward them, but they still want Western investor acceptance. That can work in favor of more transparency and market-driven decisions.
China just proposed abolishing its two-term limit for presidents, paving the way for Xi Jinping to stay in power indefinitely. What risk does that pose to investor acceptance?
It’s too soon to tell. More important will be how he uses his power, particularly in continuing to open markets and improve transparency. I’m struck by the difference in the tone of the political leadership—with Xi talking about deleveraging, constraining asset bubbles, and accepting short-term trade-offs to growth for long-term sustainability. Contrast that to the U.S., where we have a move toward deregulation and borrowing more. It saddens me that we are falling prey to short-termism.
What part of the deregulation push in the U.S. concerns you?
Many postcrisis financial reforms are still being finalized. Though the current administration was elected on an anti-big-bank kind of campaign, it has become very bank-friendly. I don’t have a problem with some deregulation, but I can’t believe we are moving to weaken capital rules for banks.
You are referring to a technical change in one provision of a bipartisan bill expected to hit the Senate floor this month.
Yes. It has a lot of good provisions, such as easing unnecessary supervisory infrastructure on regional and community banks that were caught up in the wider net after the crisis. The focus of postcrisis reforms should have been on the large, complex financial institutions that drove the problem. So that is all fine. But, of course, big banks are trying to ease the capital requirements [set after the financial crisis]. I’m hearing through the grapevine that the Office of the Comptroller of the Currency and the Federal Reserve are also moving on rules to loosen capital requirements.
Why is that problematic at this stage of the economic and credit cycle?
In these benign times, when banks have been profitable for many years and they just got a big tax cut, you want banks to keep building buffers. To loosen capital now is just crazy. When we get to a downturn, banks won’t have the cushion to absorb the losses. Without a cushion, we will have 2008 and 2009 again.
The idea we need to loosen up on banks so they can lend more to fuel growth—after a decade of highly accommodative monetary policy, a huge deficit-funded tax cut, and deregulation—is very shortsighted. And it’s not supported by data: Loan growth has exceeded gross-domestic-product growth. There is plenty of debt in the economy. The memories—and lessons—of what drove the crisis are completely being ignored. One outcome of bailing out the big banks was they emerged with a lot of political power.
What does that mean for the health of the financial system 10 years postcrisis?
There was not a lot of accountability imposed after the crisis. That was a mistake. I worry we still have the same system. Yes, it’s safer in that banks have more capital—so far—and more supervision, and the stress tests are helpful. But we didn’t fundamentally change the system.
Where, then, do you see potential problems that could trigger the next crisis?
I’d keep an eye on credit-card debt. Subprime auto has been a problem for a couple years, and valuations on loans used to finance leveraged buyouts are high. Any type of secured lending backed by an asset that is overvalued should be a concern. That is what happened with housing. Corporate debt also has not gotten as much attention as it should. It is market-funded, rather than bank-funded, but the banks still have exposure. Then there’s cyber-risk. It took us so long to get around to the reforms postcrisis that we got a little behind on systemic cyber-risk, but regulators are very focused on it now.
That’s a lot to worry about. What does it mean for the economy?
With tax reform combined with deregulation, and the economy finally picking up steam, the economy could generate pretty good growth over the next year or two. But after that, if we keep throwing gas on flames with deficit spending, I worry about how severe the next downturn is going to be—and whether we will have any bullets left. Hopefully, in a couple of years, the Fed will have gotten interest rates up to the point it can ease on a short-term basis.
But on the fiscal side, there is very little breathing room. I worry about when the safe-haven status of Treasuries is questioned. As the Fed raises rates while we are deficit-spending, it will have a negative impact on stocks. These are things I’d like to get ahead of. I don’t think Congress has a clue that the reason they have been able to get away with this profligacy is because we are the best-looking horse in the glue factory. But we are in the glue factory. Our fiscal situation is not a good one.
You have also raised concerns about the $1.3 trillion outstanding student debt. Could that trigger a financial crisis?
That debt is all on the government’s balance sheet, so no, not a market crisis. But there are parallels to 2008: There are massive amounts of unaffordable loans being made to people who can’t pay them, and the easy availability of those loans is leading to asset inflation. In 2008, that was reflected in housing prices. Today, that’s tuition. It’s too easy to raise tuition because kids will borrow to pay for it. If the loan defaults, the primary beneficiaries—educational institutions—have no skin in the game, like in the mortgage crisis.
What is a possible solution?
Income-share agreements allow students to repay a loan based on a percentage of their income over a long period. It’s impossible for an undergrad to know what their earnings and repayment capacity will be when they graduate, yet student debt is fixed. We need high school math teachers just like we need hedge fund managers, but we have a one-size payment system, whether you are making $36,000 or $360,000.
Does anyone use such agreements?
Some, like Purdue University, are experimenting with it. It has to be structured so colleges fund $1 and the government funds $1, and they share the students’ payment. That way the college’s return on investment depends on whether a student graduates and gets a job, aligning institutional incentives with student success. Private investors are leading a lot of this, but that makes me uncomfortable.
Why?
Private investors look for big risk premiums. I fear they favor STEM [science, technology, engineering, and mathematics] majors who will have high paychecks. We need a program to support a wide array of disciplines. We need to get philanthropies, the government, and endowments into the mix. Instead of owning master limited partnerships, university endowments should be putting some money into their kids.
How does student debt affect inequality and the economy?
Student-loan stories always feature someone who borrowed $90,000 to go to grad school or med school. But those people generally get jobs and have earnings potential, and debt-forgiveness programs disproportionately help them. The distress and high default rates are among the kids borrowing $10,000 to go to a for-profit school and dropping out; $10,000 may not sound like a lot to you and me, but for a first-generation student or someone without a college degree, that’s a lot of money. Student debt also suppresses small-business formation. Kids who would have started a business in their parents’ garage can’t do that now because they owe $50,000. Beyond that, it’s just a terrible financial burden for our kids that didn’t exist 20 years ago.
We also didn’t have bitcoin 20 years ago. Some central bankers are concerned about the mania around cryptocurrencies. What is your view?
Don’t put any money into bitcoin that you can’t afford to lose. But I don’t think we should ban it—the green bills in your pocket don’t have an intrinsic value, either. The value is based on what others think is its value. That’s true of any currency. Regulation should be focused on good disclosure, education, warding off fraud, and making sure it is not used for illicit activities. Let the market figure out what it’s worth. That is what it is doing now.
Thanks, Sheila.

Clarification: In an earlier version, we incorrectly said Bair heads the Systemic Risk Council, but she no longer does.
Comments? E-mail us at editors@barrons.com