ValueWalk's Raul Panganiban interviews Joseph Cioffi, Author of Credit Chronometer and Partner at Davis + Gilbert where he is Chair of the Insolvency, Creditor’s Rights & Financial Products Practice Group. In the interview, we discuss the findings of the 3rd Annual report. Q2 2021 hedge fund letters, conferences and more The following is a computer Read More
Guest post by Isaac Sprecher, a financial analyst for kitchenclique.com . He can be contacted at ymsprecher(at)gmail.com
As an individual that invests in stocks watches movies and drinks tons of coffee everyday; the recent roller coaster ride taken by shareholders of Netflix, Inc. (NASDAQ:NFLX) and Green Mountain Coffee Roasters Inc. (NASDAQ:GMCR) was quite fascinating.
These two companies appear quite similar, other than the obvious difference between one being in coffee industry and the other in entertainment. Their rise and fall basically took the shares to a similar price. Both companies have been working hard to rectify past mistakes. This article analyzes their mistakes, and what can be done to salvage both of these once highflying darlings of Wall Street.
GMCR practically put instant coffee (Folgers etc.) out of style and business from the late 2000s-present day. The easy to use GMCR K-cups, made the cups a top choice for coffee drinkers in home and the office.
GMCR’s stock was one of the best performers of the last five years. The stocks rise continued almost non stop until David Einhorn, CEO of Greenlight Capital), raised many red flags about the company.
We go back a little bit in history now to understand GMCR and their business model. In 2006 GMCR purchased Keurig , the company which made the coffee makers for the k-cups . The acquisition and great advertising haa made GMCR a household name. From Bed Bath to William Sonoma, Keurig machines have been a top seller for the last couple of years. GMCR expanded to other areas, and many offices and small breakfast houses offered the coffee to customers.
In May 2011 Gmcr and Starbucks announced a partnership to make Starbucks (NASDAQ:SBUX) flavored K-cups. GMCR’s stock price shot up from the mid 60s to near 115. This rise occurred even as many stocks tanked because of the European debt crisis.
At the Value Investing Congress last October, David Einhorn gave 139 page presentation on why he felt GMCR was a great short. Mr. Einhorn focused mostly on the company’s accounting. He was also very concerned that their K-cup patent was expiring, which seemed like a long term problem for the company. After the conference, another hedge fund manager Whitney Tilson began parading on CNBC bashing the company, which caused a massive sell off.
The expiring patent is a huge challenge for GMCR. Many companies tried to challenge Gmcr, but the easiness and neatness of the K-cup was too hard to replicate without actually using a K-cup. However in the past month Starbucks a Gmcr partner, announced that they were introducing a single cup coffee machine. Additionally, there is already a great single cup machine from the Coffee Bean Group. Will GMCR be able to hold off their former partner now turned competitor? The challenges ahead appear daunting.
Netflix was responsible for putting movie rentals stores out of business. They created a wonderful rental service through the mail. In the late 2000s we saw more blockbusters and mom and pop movie stores close. NFLX had basically taken over the movie business. They did have some competition with Redbox, but NFLX, which was much more convenient had a better business model.
As the digital age changed the industry in the late 2000s, streaming was the new age for entertainment. The demand for streaming media through the Internet made sense for the consumer and the media companies. The big networks got together; NBC FOX and ABC made HULU.com, a site were one can watch their TV Show through streaming on their laptops or even TVs . NFLX also offered streaming and mail service at unbeatable price of $10 per month.
This summer, Reed Hastings the CEO of NFLX made a couple of blunders causing NFLX to plunge from the 300 to under 100$ per share. The first mistake Mr. Hastings made was upset his subscribers by increasing the monthly price from 10$ to 16$. He then wanted to split the company into two divisions; NFLX which would offer streaming, and Quickster which would own the mail-in service. That plan was quickly scrapped, but the damage had set in. During the summer NFLX lost Starz, when the company decided not to renew the contract. Starz provided Nflx with a huge library of streaming content.
Like GMCR, NFLX might become the Research In Motion Limited (TSE:RIM) (the once popular maker of Blackberries) of movie rentals. Competition is very strong to put mildly. Amazon.com, Inc. (NASDAQ:AMZN) is now offering streaming at a very reasonable price. Additionally, NFLX’s old partners like HBO and Showtime have begun offering streaming to their cable subscribers at no extra cost. It is likely all the other networks will eventually follow HBO’S lead. Last month, Comcast Corporation(NASDAQ:CMCSA) announced they would come out with their own streaming service. So what can NFLX do to stem the tide?
The similarities between Gmcr and Nflx and pretty similar. Both had great runs and fantastic products, and are now facing heavy competition, in many cases from former partners. It appears that both companies can dominate their industries in the long run if they make the right moves (as described below), market their products well, and of course not become complacent.
NFLX should continue to produce their own original content and not rely on other networks for their content. This would avoid putting NFLX at the mercy of network TV shows. Another idea, which might make some people cringe is to have ads, and give an option for paying slightly more for to have an ad free option.
GMCR likely has a better chance of keeping their competition at bay. They can market their products well, and make new more efficient machines. Starbucks and Coffee Bean can fail in the ‘cup competition’ as there is no guarantee that either of them will even dent GMCR’s share of the industry. However if GMCR becomes complacent it will make it easy for competition to succeed.
In conclusion, the similarities between these two companies are fascinating. They are both the first at what they did well. They both were high flyers, who could do no wrong, just as it now seems they can do no right. However with time and effort from great management they can stay around for the long run.
(The author has no position in GMCR or NFLX)