Is Netflix a Short?

Feb 27, 2011
J. Webster
Comments Off on Is Netflix a Short?

Only time will tell, but who’s going to be right about Netflix, the short sellers or the longs. One major short seller, Whitney Tilson, has already bailed out, conceded that he just can no longer fight the tape as a short seller of the stock even if he thinks it’s over priced. Here’s Tilson’s conclusive reason why he covered his Netflix short

At today’s closing price of $222.29, Netflix is trading at 75.0x trailing EPS of $2.96. In more than 12 years of managing money professionally, we can’t recall an instance in which we paid more than 20x our estimate of normalized, current year earnings for any stock – and this has worked very well for us – so we won’t be buying Netflix anytime soon. But just because we don’t think it’s a good long doesn’t make it a good short.

The CEO of Netflix, Reed Hastings, weighed in on the short sellers, telling them that they should get out while they can.

For me, I just don’t see how Netflix can maintain their hold on the movie delivery system. I know they’re the ones who have put the likes of Blockbuster nearly out of business, but are they going to be able to fight off Apple, Amazon, maybe even Google with YouTube renting movies?

Netflix has to pay higher and higher fees for the rights to sell new movies and the fees aren’t going to go away. Why should they own the movie delivery sector? I just don’t see them becoming the King of the Movies – no, I’d place my bets on Apple or Amazon. Yes, the DVD is going to die, and that means trouble for CoinStar’s RedBox movie service, but this will take some time. And in this frame of time I’m guessing more companies will compete with Netflix. For instance, why can’t Hulu allow for more movie rentals? If you are a movie maker, don’t you want your movie shown at as many places as possible? I guess what it comes down to his the fees to show movies, and how soon those movies are shown. We’ll see how this plays out.

Sure, Netflix won’t be going away or anything, but they won’t win the race. Should you short the stock? Only if you’re an expert and know what you’re doing. But if the CEO of the company is warning you not to short, I’d take his word for it.

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