Constructive Criticism for Shorting NetFlix
NetFlix (NASDAQ:NFLX) is trading at estimates that would be warranted provided its the next Microsoft (NASDAQ:MSFT) or Apple Inc. (NASDAQ:AAPL). Pedro de Noronha spells out eight reasons whey he's shorting NetFlix and it resonates like a voice of reason.
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If we assume that every household in the US subscribes to Netflix, our “blue-sky” valuation only values NFLX’s business at $300 a share (and that is assuming every US household becomes a subscriber, which is not going to happen) and over time fair value probably lies closer to $70 or $80 in the event that material competition continues to enter the streaming content space at a rapid rate.
Netflix’s current valuation assumes a near-perfect growth trajectory of the company’s earnings over the medium-term and there is therefore a significant chance of multiple compression if any of the points discussed below were to transpire. Our primary thesis for this short, however, relates to the strong likelihood that current 2011 and 2012 sell-side estimates for the company are at risk of being missed.
The main drivers of our short thesis are:
1. The recent capitulation of the most vocal short on NFLX (the respected hedge fund T2 Partners) – it is always encouraging to put on a position when its most adamant advocate is stopped out of it, more often than not this happens at times of extreme pessimism or optimism.
2. 2011 estimates at 53x P/E, 24x EV/EBITDA, 4x Sales, negative FCF yield and 30x P/BV is hardly a valuation that anyone should be buying any security at – unless we believe we found the next Apple (AAPL) or Microsoft (MSFT). But Netflix is not it.