What Amazon And Netflix’s Latest Moves Will Mean For Competitors

Shares of Amazon.com, Inc. (NASDAQ:AMZN), Netflix, Inc. (NASDAQ:NFLX), eBay Inc (NASDAQ:EBAY), and Etsy Inc (NASDAQ:ETSY) were all trending on Thursday after Netflix announced that it will raise the price of its most popular streaming option by $1 a month, while Amazon.com announced that it is launching a handcrafted goods marketplace on Thursday to take on Etsy and eBay. Netflix shares gained 6.32% and another 1.27% in after-hours trading, while Etsy and eBay were both down following Amazon’s announcement, shedding 4.30% and 5.96% respectively. Let’s take a closer look at the news and examine the hedge fund sentiment towards these companies, and where they stand going forward.

Most investors don’t understand hedge funds and indicators that are based on hedge funds’ activities. They ignore hedge funds because of their recent poor performance in the bull market. Our research indicates that hedge funds underperformed because they aren’t 100% long. Hedge fund fees are also very large compared to the returns generated and they reduce the net returns experienced by investors. We uncovered that hedge funds’ long positions actually outperformed the market. For instance the 15 most popular small-cap stocks among funds beat the S&P 500 Index by more than 60 percentage points since the end of August 2012. These stocks returned a cumulative of 118% vs. a 58% gain for the S&P 500 Index (read the details). That’s why we believe investors should pay attention to what hedge funds are buying (rather than what their net returns are).

The last time Netflix, Inc. (NASDAQ:NFLX) raised prices in a major way, its stock fell from a split-adjusted $42 to $8.50 a share. Investors worried the price hike would drive subscribers to other streaming competitors such as Amazon and Hulu and worried Netflix would go under from its billions in show commitments. Although the bears were right for a period, management fixed things by making its own hit shows such as ‘House of Cards’. The unique shows made Netflix more like an online HBO and widened Netflix’s moat; they ensured greater customer loyalty.

This time around, Netflix management is raising prices piecemeal so a repeat of 2011 doesn’t occur again. The streaming giant is raising prices only for new subscribers in the United States, Canada, and parts of Latin America, while granting existing users a temporary reprieve from any price hike, which could last as long as 24 months. Netflix needs to charge higher prices to finance its aggressive international expansion and to deliver the profits that its shareholders expect. Investors will be closely monitoring the price hike’s effect on new subscribers in the quarters to come. Any softness in new subscriber numbers will dent shares.

Although it’s hard to imagine a $1 price hike having a material effect on subscriber numbers, when coupled with the loss of its rights deal with Epix, it’s possible it could be just enough to push some current or potential subscribers to choose another service. We already wondered last week if Amazon had already surpassed Netflix as the best video streaming service in the U.S, and a $12 annual price hike to Netflix only seems to align ever more with that thesis. While a price hike of Netflix can do nothing but help competitors like Amazon and Hulu, as mentioned, it’s unlikely to have a huge impact on the flow of subscribers between the services, so ultimately, the hike should benefit Netflix long-term.

Our data shows that hedge funds were bullish on Netflix, Inc. (NASDAQ:NFLX). Of the 730 elite funds in our database, a total of 50 funds reported Netflix long positions worth $6.15 billion, accounting for 15.40% of its market cap, in the latest round of 13F filings, versus 47 funds with $3.86 billion in long positions a quarter earlier. 9.8% of the float is short. Chase Coleman’s Tiger Global Management LLC owns 2.57 million shares while Philippe Laffont‘s Coatue Management owns 286,585 shares.

The handmade market is a niche market, but Amazon.com, Inc. (NASDAQ:AMZN) wants to be the ‘Everything’ store. It also doesn’t cost Amazon much money to extend its platform into turf that was previously controlled primarily by Etsy Inc (NASDAQ:ETSY) and eBay Inc (NASDAQ:EBAY). Etsy is certainly in an even more precarious position than eBay, and investors have seen the value of their shares plummet by more than half already this year, and could see them fall even further because of Amazon. Given Amazon head Jeff Bezos’ long-term thinking, Amazon’s 285 million customers, and Amazon Handmade’s lower fees, it might be just a matter of time before Amazon becomes the go-to place for millions of people around the world to find quality handmade merchandise.

Our data shows that elite funds were bullish on Amazon.com, Inc. (NASDAQ:AMZN) in the second quarter. 103 funds reported owning Amazon stakes worth $10.46 billion in the latest round of 13F filings, versus 96 funds and $8.4 billion respectively a quarter earlier. Ken Fisher‘s Fisher Asset Management increased its position by 2% to 2.49 million shares while Andreas Halvorsen’s Viking Global established a new stake of 2.28 million shares. D E Shaw upped its stake by 17% to 1.64 million shares.

Hedge funds are divided on Etsy Inc (NASDAQ:ETSY) and eBay Inc (NASDAQ:EBAY). A total of nine funds reported stakes worth $156.79 million as of June 30, representing 10.00% of Etsy’s shares. Chase Coleman‘s Tiger Global Management LLC owns 10.0 million shares and John Griffin’s Blue Ridge Capital owns 695,122 shares. On the other hand, 99 investors we track held 16.00% of eBay’s shares, worth $11.73 billion, led by Carl Icahn and his $2.79 billion position.

We like Netflix and think it’s still in a very strong position globally, but we worry about a correction. We worry Etsy’s network effect isn’t enough against Amazon, and that eBay may also suffer from the Amazon effect. We would stay on the sidelines for now for Netflix, eBay, and Etsy. We think Amazon is a good long-term holding.

Disclosure: None