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Whitney Tilson Capitulates, Covers Netflix Short

Tyler Durden's picture


From T2:

In mid-December, we published a lengthy article on why Netflix was our largest bearish bet at the time. With the stock up nearly 25% since then, one might assume that we’d think it’s an even better short today, but in fact we have closed out our position because we are no longer confident that our investment thesis is correct.

1) The company reported a very strong quarter that weakened key pillars of our investment thesis, especially as it relates to margins;

2) We conducted a survey, completed by more than 500 Netflix subscribers, that showed significantly higher satisfaction with and usage of Netflix’s streaming service than we anticipated (the results of our survey are in Appendix A, attached); and

3) Our article generated a great deal of feedback, including an open letter from Netflix’s CEO, Reed Hastings, some of which caused us to question a number of our assumptions.

In summary, while we acknowledged in our December article that Netflix “offers a useful, attractivelypriced service to customers, is growing like wildfire, is very well managed, and has a strong balance sheet,” we now believe that it is an even better business than we gave it credit for. The company has enormous momentum and substantial optionality (for example, international growth), and management is executing superbly. In particular, we tip our hat to Reed Hastings, whom we had the pleasure of meeting last weekend. In addition to his success building the business and navigating the transition from DVD-by-mail to streaming media, he’s also one of the most down-to-earth, honest and straightforward CEOs we’ve ever encountered.

To be clear, in covering our short and writing favorable things about Netflix in this article, we are not recommending purchase of the stock. Many things will have to go very right for the company to justify its current market valuation, but we no longer think it’s wise to bet against Netflix.

This is particularly true in light of our belief that this market is filled with much better short opportunities that are in our sweet spot: outright frauds (our very favorite), industries in decline or facing major headwinds, weak or faddish business models, bad balance sheets, and incompetent, excessively promotional and/or crooked management. It’s so much more rewarding, both psychically and financially, to short these types of businesses.

The conclusion:

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.

Poor Whitney still doesn't get that the whole "value investor" long/short, 130/30 or whatever concept is dead... over...dunzo. Oh well. Best of luck.

Oh yes, time to short Netflix.

Full letter:



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Thu, 02/10/2011 - 18:13 | 951090 hedgeless_horseman
hedgeless_horseman's picture

The Blackhawks (helicopters) win!

Thu, 02/10/2011 - 18:14 | 951093 rosiescenario
rosiescenario's picture

Ben: 10


Whitney: 0

Thu, 02/10/2011 - 18:15 | 951101 French Frog
French Frog's picture

That means that it's time to go short doesn't it? When real proper convicted bears throw in the towel is the time when it will turn

Thu, 02/10/2011 - 18:17 | 951109 topcallingtroll
topcallingtroll's picture

Capitulation, bitchez.

Thu, 02/10/2011 - 21:30 | 951730 Blano
Blano's picture

The pro fought the trend and lost.  Personally, I'm not going near it.

Fri, 02/11/2011 - 00:17 | 952076 Howard_Beale
Howard_Beale's picture

Perhaps he posted this in a true reverse psychology move and is all in short now... Bet he has June puts.

Thu, 02/10/2011 - 18:16 | 951104 SheepDog-One
SheepDog-One's picture

Clearly signaling the top is in.

Thu, 02/10/2011 - 20:23 | 951488 pragmatic hobo
pragmatic hobo's picture

as they say, top is a process, not an event.

Thu, 02/10/2011 - 18:17 | 951106 tmftdoyle
tmftdoyle's picture

Feels like another Julian Robertson moment. 

Thu, 02/10/2011 - 18:23 | 951133 ghostfaceinvestah
ghostfaceinvestah's picture

Sure does.  Value investor capitulating on a short with a 75x P/E.  Shades of March 2000.

Thu, 02/10/2011 - 18:45 | 951212 Don Smith
Don Smith's picture


Thu, 02/10/2011 - 18:17 | 951110 Dr. Porkchop
Dr. Porkchop's picture

Silly rabbit, dips are forbidden.

Thu, 02/10/2011 - 21:48 | 951769 nevadan
nevadan's picture


Thu, 02/10/2011 - 18:17 | 951111 Bam_Man
Bam_Man's picture

This marks "the top"?

Thu, 02/10/2011 - 18:18 | 951113 Rainman
Rainman's picture

Drowned in a shallow stream of logic.

Thu, 02/10/2011 - 18:19 | 951116 Al89
Al89's picture

With the short float % it had this stock was never going to drop just yet. Tilson will cover, a lot more will cover following him. Stock will probably hit the 250 range, maybe higher. And then, who knows?

Thu, 02/10/2011 - 18:19 | 951117 6 String
6 String's picture

Mike Krieger is right: allocators of capital, but i might add more specially the value pretenders and there are a lot of them, are one of the most brainwashed group alive, or something like that.

In other words, the average value investor is clueless when it comes to valuing the all-important U.S. dollar. When they realize discounting cash flows back to something that is in terminal decline is a useless and futile strategy, it will be too late for the most inflexible thinkers on the planet.




Thu, 02/10/2011 - 18:45 | 951205 mogul rider
mogul rider's picture





When you break it up you see how weak the notion really is. Dollar decline = absolute melt up.



Thu, 02/10/2011 - 18:21 | 951123 raya123
raya123's picture

Bought NFLX put options an hour before this article was posted, now I feel even better.

Thu, 02/10/2011 - 18:21 | 951127 A Man without Q...
A Man without Qualities's picture

Oh yes, time to short Netflix.

Damn right!

Thu, 02/10/2011 - 18:29 | 951157 Bigger Dickus
Bigger Dickus's picture

This modern day Inktomi is screaming "penny stock by 2015"

Fri, 02/11/2011 - 01:16 | 952135 Zero Govt
Zero Govt's picture

ALL US stocks will be penny stocks by 2015 

Thu, 02/10/2011 - 18:36 | 951179 UnRealized Reality
UnRealized Reality's picture

They did the same crap during the Dot Com. Yahoo never seem to go down.

Thu, 02/10/2011 - 18:37 | 951187 Mxriderbp
Mxriderbp's picture

Chipotle is the next balloon that needs to be popped. It will more than likely kiss $300 tomorrow if shorts cover on earnings. They even admitted that they do not hedge their food costs. Haha.

Thu, 02/10/2011 - 18:41 | 951195 Bigger Dickus
Bigger Dickus's picture

Whitney Tilson=pussy

Thu, 02/10/2011 - 18:46 | 951203 Pure Evil
Pure Evil's picture

I smell insider training, or is what I'm smelling the result of blowin' ass?

Or, maybe that's just Whitney blowing ass out her pie hole.

(Flatulence bitchezes!)

Thu, 02/10/2011 - 18:45 | 951210 mogul rider
mogul rider's picture

Net flix rocks man

I said so...........

pass that dube will ya

Thu, 02/10/2011 - 18:47 | 951222 6 String
6 String's picture

Nothing wrong with a good joint and some documentaries streamed me thinks....

Thu, 02/10/2011 - 19:06 | 951260 Pure Evil
Pure Evil's picture

Is that Janet Napolitano knocking down your door?

Thu, 02/10/2011 - 18:45 | 951214 mogul rider
mogul rider's picture

dube bitchez

Or bitchez with dubes

Thu, 02/10/2011 - 18:50 | 951231 DonutBoy
DonutBoy's picture

... longer than you can stay solvent.

Been there, done that, feel the pain.

Thu, 02/10/2011 - 18:54 | 951237 dark pools of soros
dark pools of soros's picture

NFLX is a growth and recession proof stock AND the current stock beauty queen


you cant kill it



Fri, 02/11/2011 - 01:21 | 952138 Zero Govt
Zero Govt's picture

with a 75/1 p/e ratio you don't need to kill the company just push the 'panic' button and watch the investor stampede for the exit doors...  

Thu, 02/10/2011 - 18:54 | 951239 I am a Man I am...
I am a Man I am Forty's picture

chanos will be the next one to bite the dust shorting big oil

Thu, 02/10/2011 - 19:05 | 951259 Waterfallsparkles
Waterfallsparkles's picture

Short capitulation.  Bad news for Nflx.  They need the shorts to continue to ramp up.  Without them there is no one to sell to.

Thu, 02/10/2011 - 20:22 | 951487 SheepDog-One
SheepDog-One's picture

Exactly. Without shorts the 75 P/E's got nothin.

Thu, 02/10/2011 - 19:19 | 951263 Pee Wee
Pee Wee's picture

NFLX has already made my year.

Easy position to take after they demonstrated cross-platform streaming.  Long way to run as they come standard on new TV's.   Swapping electrons for cash allows wide open margins.

Here's another, LVLT -- decade-dog about to become profitable, and complimentary to NFLX on the long end (and costs less than a cup of coffee).


Thu, 02/10/2011 - 19:08 | 951265 Chappaquiddick
Chappaquiddick's picture

Poor Whitney still doesn't get that the whole "value investor" long/short, 130/30 or whatever concept is dead... over...dunzo. Oh well. Best of luck.


I disagree entirely - clearly the penny has dropped that this is now the case and that's why they closed the short.

Thu, 02/10/2011 - 19:12 | 951276 Pure Evil
Pure Evil's picture

Someone's claiming that AAPL got FLASHED CRASHED today.

Thu, 02/10/2011 - 19:14 | 951283 Yen Cross
Yen Cross's picture

  I assume we have all seen the 8 dollar (4 dollar) after QE3 unlimited video and tv streaming, monthly deal? The catch is you have to own hardware for the streaming. Cross branding kick backs. I love all you guitar heros!

Thu, 02/10/2011 - 19:53 | 951385 -Michelle-
-Michelle-'s picture

Not much of a catch.  We "downgraded" our Netflix to streaming-only.  We can use it on our laptops and desktop.  We'd already purchased a Roku when we got rid of our cable.  My husband got an XBox 360 a while back and it works on that.

I like Netflix.  I don't own it because I don't own any stocks at all.  I have no idea if they are viable or vulnerable or whatever.  All I know is that they manage to take care of 95% of our tv-watching desires for $7.99 per month.  The other 5% is EWTN.

Thu, 02/10/2011 - 21:25 | 951707 Cursive
Cursive's picture


EWTN!  Old school.  I always love your posts and now every time I surf by Mother Angelica et al, I'll have visions of my mother AND you watching the crew from Irondo.

Fri, 02/11/2011 - 10:50 | 952562 -Michelle-
-Michelle-'s picture


Thu, 02/10/2011 - 19:17 | 951288 Diogenes
Diogenes's picture

Denninger thinks Netflix is a short. He also thinks gold is a short. Both, for completely logical reasons.

What more do you need to know about today's markets?

Thu, 02/10/2011 - 19:20 | 951299 OptionsHedge
OptionsHedge's picture

I hope Tilson took a bite out at PNRA and CMG. They are both ramping up about 10% AH. That's where the crowds were headed.

Thu, 02/10/2011 - 19:21 | 951305 Buckaroo Banzai
Buckaroo Banzai's picture

Anybody else getting the Netflix banner at the top when you load this article? I believe that's called IRONIC.

Thu, 02/10/2011 - 19:41 | 951360 tahoebumsmith
tahoebumsmith's picture

I believe that's called google watching everything you read and supplementing it with their advertising of choice.

Thu, 02/10/2011 - 19:22 | 951310 gwar5
gwar5's picture

Somebody forgot to tell the poor guy the markets are rigged and the Fed is pumping up stocks.

If this guy doesn't get it, what chance is the average person going to have?

Thu, 02/10/2011 - 19:47 | 951374 onarga74
onarga74's picture

When he lifted the hood he found out that he was really short the printing presses of the federal government.  Rule #1.  A market that always goes up isn't a market. It's an unborn disaster that hurts more people than it could have ever helped.

Fri, 02/11/2011 - 00:59 | 952120 StychoKiller
StychoKiller's picture

Cthulhu snaps a tentacle, people die -- what else is there to discuss?

Thu, 02/10/2011 - 20:02 | 951417 max2205
max2205's picture

Open limit GTC short at $400

Thu, 02/10/2011 - 20:07 | 951436 Trimmed Hedge
Trimmed Hedge's picture

Perhaps "value" investors like Whitney shouldn't be screwing around with shorting -- and instead focus on going long "value."


But, what do I know....

Thu, 02/10/2011 - 21:39 | 951748 PeterSchump
PeterSchump's picture

Yes, we know Trimmed Hedges value the longs rather than shorts.

Thu, 02/10/2011 - 20:22 | 951483 antidisestablis...
antidisestablishmentarianismishness's picture

It's refreshing to see someone blaming himself for his own bad decisions!

Thu, 02/10/2011 - 20:27 | 951504 lbrecken
lbrecken's picture

If you want to know whats really going on with NFLX read this.....especially the accounting gimicks.....

Thu, 02/10/2011 - 20:44 | 951563 Monkey Craig
Monkey Craig's picture

not the first one Tilson has been wrong on. Motley Fool readers will remember Jet Blue circa 2003.


Tilson called Jet Blue the best business he had ever seen.

Thu, 02/10/2011 - 21:26 | 951711 neoclassical ec...
neoclassical economics is retarded's picture

I refuse to short any momentum stocks during this mania but God I can't wait until this thing crashes so these people learn a lesson, cause apparently they didn't learn from the other two stock bubbles from this decade.

Thu, 02/10/2011 - 21:50 | 951774 BearishFeijoadaSushi
BearishFeijoadaSushi's picture

pwned with a choppershot

Thu, 02/10/2011 - 22:07 | 951800 Pure Evil
Pure Evil's picture

Why is it that its only insider trading when you talk to the CEO, buy a shitload of the companies stock, then make a killing after the stock goes up.

But its not insider trading after talking to the CEO and you decide to sell your shares, irregardless of whether it was at a profit or a loss.

Fri, 02/11/2011 - 00:29 | 952088 philgramm
philgramm's picture

regardless is a word, irregardless not so much

Fri, 02/11/2011 - 08:26 | 952331 ColonelCooper
ColonelCooper's picture

Did you understand what he meant?  Then go fuck yourself.

Thu, 02/10/2011 - 22:19 | 951842 UninterestedObserver
UninterestedObserver's picture

Netflix will now crash within 4 days

Thu, 02/10/2011 - 22:40 | 951904 RockyRacoon
RockyRacoon's picture

I presume you mean the stock value.   I certainly hope my subscription manages to stay afloat 'cause I get BluRay DVDs in the mail and all the downloads I care to cram into a day.  I could care less what the "market" says.

Thu, 02/10/2011 - 22:49 | 951926 RetiredVet
RetiredVet's picture

p.p1 {margin: 0.0px 0.0px 13.0px 15.0px; line-height: 16.0px; font: 13.0px Verdana}

This isn't about CSCO, but I cannot post here unless i reply to a I picked this since it is earning season...

I found this article on "Earnings Chicanery" quoting analyst Howard Schilt:

Schilit offers as an example. He says the online sales company inflates its revenue by booking the full price of airline tickets, rental cars and hotel rooms, even though it keeps only a small percentage of the cost after paying the supplier. “If secures a hotel room for $100, and a customer bids $150 for the room, Priceline books the full $150 as revenue,” says Schilit. “But it should be booking only $50. Because if the room remained vacant, would Priceline write out a check to the hotel for $150? No, so the company’s risk is limited to $100. If, on the other hand, Priceline was bearing a risk of $150, then it would be fine to book the full dollar amount as revenue.”


Given the "optimistic view by analysts that PCLN is currently trading at 23 times next years earnings and 49 time trailing.......are we getting alittle "frothy" here?????   The short interest has wained........I smell a pop in this little bubble coming.....any thoughts?


Thu, 02/10/2011 - 23:00 | 951954 Ted K
Ted K's picture

You know, there's lots of smart ass remarks I could make about this little "revelation" from Mr. Tilson.  All I can say is remember this next time some jackass "expert" is on CNBC (or even the more somber and reality based NBR) and wants to pump up stocks they don't have in their personal portfolio.  Hey Wall Street, Hey FINRA, suck my cock!!!!

Thu, 02/10/2011 - 23:02 | 951957 cat2
cat2's picture

funemployment RULES

Fri, 02/11/2011 - 04:13 | 952250 lolmaster
lolmaster's picture

dear mr whitney, welcome to the world of levered pomo momo frontrunning. you're late to the game but if u use enough lev u may get invited to cnbs

Fri, 02/11/2011 - 11:28 | 952669 Sheriff Douchen...
Sheriff Douchenik from AZ's picture

Reminds me alot of XMSR and SIRI (XM Satellite) back in 2004/05 - complete run up that stampeded the shorts but eventually it all came together as the stock basically went to zero in the next few years. It was all about surviving the 04/05 wall st love in. I think Whitney should continue to monitor this one...once it decisively breaks watch out below and should be a great MULTI year short.

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