Since I wrote my last article on Netflix (NFLX), NFLX is up over 50 percent in about four months. Today I am finally unloading all of my position. Here's my short term view, despite my long term bullish outlook on the company.
Why I am short term bearish on NFLX
The first reason I am short term bearish is that technically, in my opinion, it has become very overbought. In the last 17 trading sessions the stock has surged 62 points (when I sold at 302) and that is good enough for 25 percent. If I did not unload my position today, I would be a pig. The one skill that I found more important than anything is discipline. It is over 20 points above the 10-day moving average and has not tested it since this 17-day explosion ignited.
Below is a six-month chart of NFLX against the ten day moving average.
The second reason I am short term bearish on NFLX is I am very suspicious of the recent price increases. A very vocal short named Leonard Brecken, has been pointing out problems with NFLX's off balance sheet debt and readjusted accounting over the last year which changes the way in which the company has been amortizing the content costs. Brecken's reasoning is sound for why he is short, but momentum traders and growth addicts are willing to ignore this, hoping subscriber growth and international penetration would make up for this off balance sheet debt in the future.
However, I think the recent price hikes are a prelude to a disappointing earnings announcement on July 18. I think margins will be worse, and possibly subscriber growth will not meet expectations. I think now is the time to sell. I would rather buy the stock higher with clarity than hold it with uncertainty.
The third reason is because of the way it has traded the last two days. If you look at a candle stick chart, for the last two trading days the stock has made two reversals on higher than average volume. On Monday, the stock exploded to the upside over 300 to make a new all-time high before reversing over almost 15 points intra-day. Today, it also seems to be following this pattern. To me, this signals that the heavy hands are getting out and the weaker hands are getting in.
The fourth reason is the flurry of the target price increases by many investment firms when the stock is at an all-time high. I have found that this can generally be a sign of a near term top.
Why I am long term bullish on NFLX
- I love the product as a consumer and it keeps getting better.
- I feel that there is very little competition. I hear analysts compare the product to Hulu, but I don't think any of them realize the huge differences between the companies. NFLX is older content, with no commercials, and about 100 times the amount of content of Hulu. Hulu is newer shows that all have a shelf life, and they show ads every 15 minutes with next to no movie selection. The two products are actually quite different than analysts realize.
- The international growth is still in its infancy, and with its new move into Latin America, especially Brazil, I see huge opportunities for growth.
- Reed Hastings, the CEO of NFLX, was recently named to the board of directors at Facebook. This is key, and in my opinion even bigger than the Latin America penetration. Facebook currently is a mandatory platform for businesses as well as a fun social outlet for the average individual to keep in touch with or find friends. But it is so much more than that. Facebook, despite what many think, will become a new form of online bank that I believe will eventually crush PayPal because of the Facebook credits. Facebook will do two things for NFLX: Drive more people towards the site, and potentially allow customers to pay for the subscription using Facebook credits, which a lot of users don't "technically" consider money yet.
Where I reallocated the capital from the sale of NFLX
- I bought Apple (AAPL) today because I love the long term fundamental story, and it always has a tendency to run up into an earnings announcement. If it can break out and make a new high, as long as earnings are in line, the stock will shoot immediately to 400-420.
- AutoZone (AZO): Auto sales have been lagging and AZO is a great secular growth play on the consumer holding onto old cars or buying used cars.
- Priceline (PCLN): The growth here is still astounding. Bookings.com gives it almost a monopoly in Europe and I believe there is a lot more international growth for it ahead.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Source: Why I Sold Netflix at $302
