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Play of the week: Get long NFLX and ERTS*

October 24, 2011

Again, today is Monday. Sorry your weekend-long keg stand had to come to an end. On the upside, it’s time for the play of the week! To make you feel better about your frat party induced hangover, I have two plays of the week!

Realistic war video games...sweet! Let's make some money, Blackwater style!

Get long NFLX.

Oh, how the mighty have fallen. After shedding 60% of it’s value in two months, NFLX reports Q3 earnings after the bell today (Monday). There is no doubt that Netflix’s new pricing plan ($7.99/mo for streaming plus $7.99/mo for DVD delivery) versus formerly $9.99 for both services combined will continue cause customers to move on from Netflix. The true reason for the price change is to set Netflix up for making moves abroad. Some analysts project up to 2 million more users dropping Netflix’s service, however I believe this is too much. DVDs are maturing, streaming is king. I think most users will be content paying the $7.99 for the streaming service rather than dropping their subscription completely. I certainly would shell out $7.99 to stream unlimited movies every month.

Consensus EPS expectation is $.95 on $811 mil in revenue. My projection is in the $.97-.98 range. Nothing spectacular, but a beat nonetheless.

The real kicker here is guidance! There is a huuuuuge untapped market outside the US that NFLX holds very little/no traction in. This new pricing plan was instituted to allow NFLX to move competitively into foreign markets. I expect the conference call to cover netflix’s plans to make moves abroad, as well as some ambitious projections. Look for guidance alone to boost NFLX 10% or more higher after hours.

Get long ERTS*

The reason for the star caveat is **drumroll please** Battlefield 3 reviews. That’s right, video game critics will have a huge say in this stock’s short-term movement. EA bet the house on developing Battlefield 3. The game is meant to be a direct competitor to Activision’s Call of Duty franchise. Last year, Call of Duty: Black Ops sold $500 million worth in it’s first week. That’s about 8 million copies in one week!!! You read that correctly. That’s James Cameron money. In fact, it’s more than James Cameron money.

EA has put together what looks to be a great game in Battlefield 3. Previews are all relatively positive. The game will finally be released on October 25th. There’s a big question mark here: EA gagged any early reviews by sending out a last minute patch for the game, so reviewers can’t review the game until they play the finalized version of the game, with the patch included. My question is why did they do this? Do they know reviews will not be as stellar as first expected? Tactics like this, not allowing reviews before release, are common in Hollywood when movies are much worse than expected. Reviews should start rolling out tomorrow, and if they are overwhelmingly positive (above 8.5 aggregate) , jump on this stock like you would on a grenade and your squad were in danger! If reviews are below an aggregate 8.5, most consumers will just wait for Call of Duty: Modern Warfare 3, which releases on November 11th. Believe me, these two franchises are largely substitutable. With the economy not looking too bright, I expect most consumers to only want to shell out $65 for one modern first-person shooter.

ERTS also reports Q3 on Thursday after the bell. Mobile and social numbers will be up, and we’ll get some nice sales updates about Battlefield 3. Guidance will be extremely positive, with The Sims and Battlefield 3 chalking up big revenue.

So in short, get long NFLX before close today and get long ERTS before earnings on Thursday IF and only IF reviews for Battlefield 3 are positive.

Here are some good websites for checking out Battlefield 3 reviews: (UPDATE: IGN will release their Battlefield 3 review in one hour at 12:01 PST, Monday 10/24)

One Comment leave one →
  1. Anonymous permalink
    October 24, 2011 4:51 PM

    Dropped the ball a bit on NFLX.

    I expect raving reviews on BF3 but I am not sure they will be able to directly compete with Modern Warfare 3, since the MW games in the CoD line have been the most critically acclaimed games. If BF4 comes out around the same time as whatever followup there is to Black Ops, they will have much more success then.

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