Understatement Alert: Whitney Tilson Finds Netflix Capital Raise “Irritating”

Nov 22, 2011
J. Webster
Comments Off on Understatement Alert: Whitney Tilson Finds Netflix Capital Raise “Irritating”

Yeah, like when a fly or a mosquito keeps hovering around and just won’t go a way.

In what is the understatement of the day or month or even year, Whitney Tilson says he thinks Netflix made the right move to raise capital but finds it “irritating” that they’re issuing stock at 1/3 the price to which they were buying it just a few months ago.

When he says irritating I’m sure he means incensed, angry, frustrated, and cartoon like Yosemite Sam mad – where fire comes shooting out of your ears you’re so mad. This is a stock he of course famously went short and then bought back at entirely the wrong time and now is going long. And you’d think he might keep some of this quiet, so he doesn’t have to look so foolish.

I’ll bet whenever he sees an ad for Netflix when he’s surfing the Internet he grits his teeth or throws something across the room. I’ll bet he can’t even watch movies anymore on Netflix. He might have even canceled his membership. Actually, he probably tested it out for free, canceled it, and then decided to pay for it again but he doesn’t even use it.

To say that Tilson is obsessed with shares of Netflix is also an understatement. Netflix has become Tilson’s white whale and albatross and might be his undoing – if not financially then surely mentally. The risk reward now is skewed to say the least. He might as well start flipping coins to see if he should buy or short or sell or hold. Netflix is Tilon’s scarlet letter.

Netflix probably did the right thing by raising $400 million. It more than triples the company’s net cash position from $166 million to $566 million and removes nearly all liquidity risk. When you’re betting on a medium- to long-term turnaround, you first have to make sure that the company doesn’t hit a cash shortfall in the short term.

That said, it is irritating to see a company we own issuing stock at 1/3 the price at which it was buying it only months ago – yet another example of the capital misallocation decisions that are all too common in Corporate America. It’s really quite simple: if a company has excess cash and its stock is deeply undervalued, it creates value to buy it back; conversely, if a stock is obviously wildly overvalued, then a company is creating value by issuing as much stock as possible, either to buy real assets, raise cash, or pay employees. It’s one of the dangers of shorting high-flyers: if they’re clever, they can use their overvalued stock to create real value. (Barron’s)

In the end, for Whitney Tilson, this is one of those serenity now type of moments that Kramer had on Seinfeld.

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