Netflix (NASDAQ:NFLX) is one of those stocks where I had a really hard time understanding why it kept on going up. The more I looked at its financials, the more I got perplexed. It hardly has any cash left and a current liability of over $1B. Unless it can magically grow its way out, there's little chance this company can remain viable.
To make money in the market, sometimes it really doesn't matter whether a company's stock price makes sense or not. It's more important to be on the right side of the trade. There were way too many people looking at this company from a "cool" concept perspective and got away from the nuts and bolts of a successful company. Many months ago, I threw away the notion of looking at this company from a fundamental perspective.
The stock peaked on July 13, 2011 at over $300. On July 29, 2011, I suggested going short at $266 (See chart, A). It turned out to be the right call but I had no idea it would drop so quickly so fast. In just a little over two months, it dropped to $106, a 64% decline from the peak and a 60% decline from the initial short suggestion on July 29, 2011. It also broke through the low on 9/29/11. My prediction is that there's a long line of people who are just waiting to exit this stock.
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Is This the Time to Buy?
I don't think so. Netflix is a broken stock and a broken company. We may see a short rally but the overall trend will be down. The market is finally waking up to the true value of Netflix.
So, How Can You Play This Stock?
1. You can simply short this stock. To me this option is a bit too risky given how far the stock has declined.
2. Use options. I like this approach. It allows me to limit my risk in the event that I am wrong. Buy the Dec 100 Put for $12.71 and sell the Dec 75 Put for $4.62 for a net debit of $8.09. The max profit is $16.91.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.