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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hedgeless_horseman's picture

The Blackhawks (helicopters) win!

rosiescenario's picture

Ben: 10


Whitney: 0

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

Blano's picture

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

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.

SheepDog-One's picture

Clearly signaling the top is in.

pragmatic hobo's picture

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

tmftdoyle's picture

Feels like another Julian Robertson moment. 

ghostfaceinvestah's picture

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

Dr. Porkchop's picture

Silly rabbit, dips are forbidden.

Bam_Man's picture

This marks "the top"?

Rainman's picture

Drowned in a shallow stream of logic.

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?

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.




mogul rider's picture





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



raya123's picture

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

A Man without Qualities's picture

Oh yes, time to short Netflix.

Damn right!

Bigger Dickus's picture

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

Zero Govt's picture

ALL US stocks will be penny stocks by 2015 

UnRealized Reality's picture

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

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.

Bigger Dickus's picture

Whitney Tilson=pussy

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!)

mogul rider's picture

Net flix rocks man

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

pass that dube will ya

6 String's picture

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

Pure Evil's picture

Is that Janet Napolitano knocking down your door?

mogul rider's picture

dube bitchez

Or bitchez with dubes

DonutBoy's picture

... longer than you can stay solvent.

Been there, done that, feel the pain.

dark pools of soros's picture

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


you cant kill it



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...  

I am a Man I am Forty's picture

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

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.

SheepDog-One's picture

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

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).


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.

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!

-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.

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.

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?

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.

Buckaroo Banzai's picture

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

tahoebumsmith's picture

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

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?

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.

StychoKiller's picture

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