Netflix: Cover Alert on Short Position

What:

Wednesday I covered my short position in Netflix (NASDAQ: NFLX) at $39.90 per share.

The total amount shorted was for a 1/2 position out of a full position, accounting for about 15% of my portfolio.

Those that follow me on Twitter received this update Wednesday as I made the transaction.

Why:

As I recently wrote, I think that the stock has gotten way ahead of itself, and has now shown extreme weakness, good fundamentals or no fundamentals.

This was always meant to be a short term trade, but with the bull market that we are in, whether or not you think that it is a long sustainable bull market or a bear market rally, it’s here now, and fighting that is a hard thing to do.

I will point out that Netflix has thus far shown extreme weakness even in the face of this tremendous rally in the market, and has thus underperformed the market since its March lows by about 15% usually on higher volume to the downside, and rising only on lighter than normal volume.

Even last week when arch-rival Blockbuster (NYSE: BBI) reported horrible earnings and a revenue shortfall, NFLX rose modestly on light volume.

Wednesday was the same story.

This doesn’t even include my macro and micro reasoning for shorting NFLX.

Reasons that include:

• increased competition by rival kiosks by Coinstar’s (NASDAQ: CSTR) Redbox machines and Blockbuster
• rising postal rates (which will continue to rise as the post office is losing gobs of money, even thinking about scaling back to 5 days a week delivery vs. 6)
• increasing costs for their streaming service
• the eventual burnout of the DVD
• testy upcoming negotiations with movie studios for streaming content
• an improving economy with consumers looking to “trade up” to actual movies, dinners out, etc., and dropping their NFLX accounts, and many, many more.

In addition, if you look at the volume/price action, as well as noticing that Netflix has breached some major support levels (10 day, 25 day, and 50 day SMA) on HEAVY volume, I still think we are in a favorable position longer term for shares to trade lower, and at the very least to underperform the market, but because shorting stocks can be dangerous, I wanted to ensure no worse than breakeven.

click to enlarge

There’s a cardinal sin in stock trading that separates that truly great from everyone else: never turn a winning position into a losing one.

I’ll look to re-enter the short if conditions warrant.

Right now, I’m going to hang back a bit, and see how it plays out.

Warning:

If you are unfamiliar with shorting and how it works, please read

my explanation and disclaimer about shorting

before taking any action. Shorting stocks can be very dangerous if you don’t know what you are doing, and goes against the usual long-only bias of my website, but I will not hesitate to short stocks when the

risk/reward

favors us greatly.

Comments

[raytayzmd:]

...so you lost how much on the trade?...and from this we're supposed to learn???

May 20 11:44 AM

[jkk:]

you should have stuck to your guns - netflix is going down - you panick you lose - zero subscriber growth so far this quarter - not something that should be coming out of a growth company priced as such and a "recession proof" company

May 20 01:21 PM

[Chris Ferna...:]

Didn't lose anything on the trade, that's the whole point.

With the market the way it is, it's just not the right time to short, unless you are super willing to give the stock 10% or so run on the downside and be able to hang on with the vacilations.

I was not, and took my money off the table even.

Longer term, as I already expressed, I think we'll see more downside.

Chris

May 20 03:10 PM

[Tangledwebw...:]

please explain what you think why costs for streaming are going up?

May 22 08:50 PM

[Chris Ferna...:]

Hey Tangle,

My appreciation for streaming costs are NOT related to the actual bandwidth being purchased and used by NFLX, but rather by the renegotiations that they are going to have to go through with the studios, thus raising their cost to deliver streamed content.

If you already look Netflix does not offer all of their available movies for streaming to everyone.

I'll give you an example: I subscribe to the cheapest plan, 2 DVD's per month, 1 out at a time.

I am able to stream a bunch of TV shows and movies to my computer (not TV since I need at least the $9.99 plan I believe for that), but some of the movies that it says I am able to stream, I actually can't because my plan "does not allow for that movie to be streamed" as Netflix puts it.

Think about it this way: If NFLX is already curtailing "unlimited" streaming because of higher costs for certain movies forced upon them by the studios, what's going to happen when those are raised further in the future for better movies, or even for older titles?

Yep, costs will rise, margins will fall, and NFLX will look much less appealing not only to us as investors, but more so to the actual customers who are going to get tired of being nickle and dimed to death for higher programing costs, and less content.

Chris

May 23 04:40 AM

[bricki:]

While I think NFLX is a bit overdone at this point the long term picture for them continues to be very positive. They have no competitors in their core business and in the streaming business. They killed WalMart's rental attempt and Blockbuster is a dead man walking because NFLX has destroyed the brick and mortar video rental business. The news that Blockbuster is reducing inventory is the obvious sign that it is all over for them. Netfix will sooner or later end up with every Blockbuster customer.

Kiosks are talked about a lot but are a very very tiny fraction of the business. Kiosks cannot deliver either the selection or convenience of Netflix. They will always be an insignificant niche the serves the impulse market or those who still haven't caught on to the internet.

Yes Netflix faces some hurdles increasing the streaming catalog mostly because studios don't want to have streaming kill their physical media sales. But in the long run it doesn't really matter. Some business model will get worked out and Netflix will deliver it to America.

Trying to short a stock that is a category killer when the market is rising is just not a smart move. Yes you might be lucky and catch it when they are in some sort of retracement but the fact is that you are bucking the long term story. The odds are against you.

May 23 10:06 AM