Our friend Rocco Pendola made his bones here a few years ago, pounding the table against Netflix (NFLX). He turned out to be right, in the near term, but the stock has since recovered more than half those losses and now stands at $186/share.
It may be time to go short again.
Most of the gains came after an NPD report stating that most people stream to TVs, not to devices, noting that Netflix is the dominant player in TV streaming, while companies like Amazon.com (AMZN) mainly stream to devices like its Kindle. The company's report for December also looked strong, with year-over-year revenue growth over 10% and actual income.
This news was enough to force shorts to cover, and by the time they did the stock had skyrocketed. Its short interest is now half what it was at its peak, but total short interest is only about 20% lower than it was at the time it shot up.
Still, stronger isn't strong. Netflix remains, basically, a break-even business. Operating cash flow fell from the levels of 2011, substantially. Competition is now hitting from every side, with Amazon having recently launched its own $8/month plan, and Google (GOOG) YouTube usage continuing to increase. Then there's CoinStar's (CSTR) Redbox, now entering the market, not to mention Wal-Mart's (WMT) Hulu.
Rocco's call was based on the cost of licensing content, which he believes will always rise to match, or beat, the revenues any outlet can receive. The best content companies control their own pipes, as Disney (DIS), News Corp. (NWS) and Comcast (CMCSA) do. When a Universal movie is licensed to an NBC affiliate, in other words, Comcast pays itself, and the higher the price the more the profit.
Netflix has tried to enter this market with its own series, and found a hit with the controversial House of Cards, which had so many product promotions in it that some said it felt like one big commercial.
Netflix has also moved against its technological weaknesses, especially its dependence on Amazon, whose frequent outages during 2012 impacted Netflix' customers. Under Neil Hunt it is continuing to install its Open Connect servers at major streaming points, pushing the location of Netflix content closer to customers throughout the U.S. and Europe. The company is also offering cash prizes to developers who can extend that platform.
The hope is that, by extending servers into many locations, by becoming more redundant and less dependent on Amazon's Virginia data center, Netflix cannot only wean itself away from its larger rival, but possibly create something that can compete with companies like Akamai (AKAM).
A great story, but just a story. As hard as Netflix is working against its challenges, those challenges remain real. Thus it remains vulnerable. Any bad news will hit the stock hard, as it's now priced to near-perfection in execution.
Unlike Rocco, I think there's a business here. But I don't see it worth $185/share. More like $100. If you like playing things short, this is still a good short for you.
Disclosure: I am long NWS.