Netflix and Short? How the Streamer Is Viewed on Wall Street

Netflix has been the premier stock on Wall Street since its meteoric ascent from a penny bet to a member of the FAANG club. If you purchased shares in the streaming juggernaut before 2016 and have held it ever since then, you have more than tripled your investment. Will investors perpetually binge on the tech titan? One Wall Street heavyweight recently turned heads for claiming that the Netflix saga has “busted” and that his firm is substantially shorting the streamer. Is this a justified position or will the unprofitable Netflix survive the negativity and mirror Elon Musk’s year-long tale of burning the shorts?

Counting Quarters

Netflix recently announced its fourth-quarter corporate earnings and provided a mixed report. The company enjoyed better-than-expected revenues of $5.47 billion and an earnings per share of $1.30. These two numbers alone helped lift shares more than 2% during after-hours trading and added to its year-to-date gains of 8%

However, there was some consternation among shareholders and analysts, triggered by its lackluster subscriptions and cash flow. Netflix reported that its domestic (U.S. and Canada) paid subscriber additions came in at 550,000, which fell short of the market forecast of 589,000. But its global subscribers were higher than the median estimate: 8.33 million versus 7.17 million. Netflix suffered a negative cash flow of $1.7 billion in the October-December period and projects its negative cash flow will total $2.5 billion in 2020.

Netflix CEO Reed Hastings said on the company’s earnings call:

“We’re on the glide path, slowly, towards positive free cash flow. We’re excited about that but that’s not coming from shrinking back our content spending. That’s coming from the increase in revenue and operating income.”

In a letter to shareholders, Netflix attributed the disappointing membership growth in North America to price hikes and the new streaming platforms entering the market. It added that it had witnessed a “more muted impact” from competitors outside the U.S., but that is because a lot of the newer streaming services have yet to come online globally, which could eventually affect Netflix.

Is this the beginning of the end for Netflix? Or is this much ado about nothing and the world will Netflix and chill and see the stock appreciate for decades to come?

Streaming Red Ink

According to a new forecast by BMO Capital Markets, Netflix will invest approximately $17.3 billion on content in 2020, up from $15.3 billion last year. The Wall Street firm anticipates content spending to top $26 billion by 2028. And there lies the problem, warns David Einhorn of Greenlight Capital.

Writing in a research note to clients, Einhorn revealed that his hedge fund is adding to its short positions of Netflix. Despite Hastings assuring investors that the company’s cash burn has peaked, Einhorn stated that Netflix goes through several billion dollars a year in cash and has accumulated extraordinary levels of debt over the years – and this does not include future content commitments. Every few months, you are constantly reading news articles about Netflix borrowing $2 billion to fund original content or selling $6 billion in junk bonds to finance its award ambitions.

As long as the credit rating agencies are giving the nod to these bonds and there is investor demand, then what does Netflix care? It might not matter now, but what happens when its debt becomes insurmountable? For those not keeping track of the company’s finances, it has a total debt load of about $13 billion and growing.

The other concern for Einhorn is that Netflix is no longer the only game in town. There has been an enormous increase in competition: Amazon Prime, Apple TV+, Disney+, and Hulu, and there will be new video-on-demand (VOD) services being launched over the next few months, including HBO Max and NBCUniversal’s Peacock.

The hedge fund manager, who made big bucks shorting the dot-com bubble, wrote:

“NFLX is no longer the only value-priced streaming VOD provider. There are now a half-dozen subscription services and in the coming year there will be additional credible entrants with deep content libraries. Not every customer will choose to subscribe to all services, and on the margin, substitution will occur.”

Netflix may have pioneered the industry, but the brand may not live on forever. Or will it?

Burn the Shorts

How are your shorts? Did you burn ‘em or did you add to them?

Early last year, Tesla Motors CEO Elon Musk promised a “short burn of the century” as investors were betting against the automaker. Less than a year later, Tesla’s market capitalization is above $100 billion, and the short sellers are giving Musk a monumental payday. With shares continually posting record highs, the shorts must concede defeat and buy the stock back, lifting Tesla’s share prices even higher. That is what you get for betting against Musk.

Could the same thing apply to Hastings and Netflix? Interestingly enough, one of the biggest short-sellers of Tesla was none other than David Einhorn – Musk wrote him a letter and seemingly gloated.

While the media are poking fun at Einhorn for failing to beat the market again, there is a huge difference between Tesla and Netflix. Tesla is a unique company with distinctive technology. Netflix was a unique company with rare technology. Multiple companies do what Netflix does, from streaming to content production and distribution – and some of its rivals, like Amazon, have other business models to help finance content endeavors. Tesla, meanwhile, is in the process of developing battery recycling systems that can power its electric cars for more than one million miles – other automobile manufacturers cannot do that.

Put simply, Netflix’s innovation is already in its past. Unless it can develop an entirely new concept, then it could suffer the same fate as other multi-billion-dollar juggernauts of yesteryear.

Netflix and Liquidate?

Until the easy money spigot stops flowing, the biggest companies on the New York Stock Exchange will continue to add to their share prices. There might be some hiccups along the way, but cash injections and historically low interest rates are ingredients for a recipe of a market rally. Once the Federal Reserve hits the pause button on money-printing, many of the publicly traded firms that are deep in the red will have a tough time staying afloat. Perhaps in the next few years, it will be Netflix and liquidate.

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Read more from Andrew Moran.