Some Questions for Netflix Shorts
When Netflix (NASDAQ: NFLX) first started its rapid ascent people were shorting because with an indebted government, postage rates had to rise thus trimming the company’s margins. Then the short argument shifted to claim that the competition from Google, Apple, Amazon, Hulu, etc. would be too intense. Now people talk about the rising cost of Internet access due to bandwidth usage. What I really want to know is this: considering our economy, as noted by the shorts, does face such severe headwinds, why short Netflix, a story of dynamic and unknown potential today when there are other companies far more exposed to our underlying economic weaknesses?
It’s one thing to not believe in the upside, it’s another to believe something is an outright short and considering the short interest on the stock many do think it’s an outright short. I definitely think a lot of people these days see something rise quickly and automatically presume bubble. You often hear the shorts say “investors think ‘it’s different this time’ when it’s not.” If that’s what you think, then tell me why it is no different with Netflix.
Ultimately the question isn’t whether Netflix is overvalued at today’s price. I do think the stock chart is a bit overextended on the chart right now and a pullback or sideways consolidation would make sense, but that’s not reason to sell for a long-term holder who thinks this could grow into a much larger media mogul. Even after the dramatic run-up, Netflix market cap is only mid-cap status and it’s by no means a large company that should fall victim to the law of large numbers anytime soon. Shorting this stock really comes down to simply thinking Netflix has no way to achieve the potential built into the stock price and I have yet to see that argument neatly stated other than from the starting point that the stock has gone up too much.
More to the point, my question to you shorts is why short Netflix when there are other far more compelling short stories out there? My readers know that I have a long bias these days, but after this latest rally I do think there are some compelling shorts. What I want is for someone to explain to me why they chose Netflix as a short as opposed to other dying or near-death technology companies like Garmin or RIM or other high-flying tech stocks like Coinstar with questionable growth potential at best? Or why Netflix over a struggling home builder, a weak bank, or an over-levered retailer?
Disclosure: Long NFLX and GOOG