Keep Shorting Netflix - There Is Still Money To Be Made

| About: Netflix, Inc. (NFLX)

Netflix (NASDAQ:NFLX) could use a break.
NFLX YTD ChartClick to enlarge

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I was very critical of Netflix in my last article when I urged you to “sell Netflix today” at $132.13. I focused on the lack of barriers to entry, and in the past twenty days Netflix has tumbled over $20, or 17.8%. In contrast, the S&P 500 has risen a modest 2.7% over that same period. If you expand the time frame back a full month Netflix has been absolutely slaughtered to the tune of virtually 50%.

To summarize my short case, I do not plan to ever invest in Netflix because larger, more resourceful competitors such as Apple (NASDAQ:AAPL) or Amazon (NASDAQ:AMZN) can enter the business and make Netflix look inferior very quickly. In this article I need to focus more on Netflix’s lackluster management and public relations department. Let's take a look at 2011 for Netflix:

  • June 17: Starz (LSTZA) content pulled from Netflix over dispute
  • July 12: Netflix increases price of plans by up to 60%
  • September 18: Plans for Qwikster announced
  • October 10: Abandoned plans for Qwikster

Yikes! Is CEO Reed Hastings using a magic eight ball to choose the strategy of the month? How can anyone justify using Netflix when the company clearly has no idea what its short-term, intermediate-term, or long-term plan is? The latest decision to reverse the plans for Qwikster may have been correct, but the sudden action is jarring for consumers. Analysts severely punish companies that are unstable and difficult to predict – Netflix is now the definition of unpredictable. As my associate Rocco Pendola put it, “Netflix Continues To Distort Reality For Investors” and I fully agree.

I suspect that Netflix was planning to spin off the DVD business to more easily facilitate a quick sale in the next six months or so. There is really no other logical reason for the plan to spin off the cash cow business. The decision to scrap the plan so quickly sends a strong signal to me as an investor that something is quite wrong with the underlying business. Perhaps I am wrong, but insider actions send a strong signal and I do not want to risk my hard earned capital on a potential sinking ship. Until I see signs that management (a) knows what they are doing and (b) better aligns pricing with the economic climate I cannot take my finger off the sell trigger.
NFLX vs S&P MonthlyClick to enlarge

With a P/E near 30, I definitely think there is money still to be made by shorting/buying puts against Netflix. In September I recommended buying NFLX Jan 2012 LEAP Puts and I stand by my recommendation. If you still have not taken profits from my original short call, please do so immediately. This market is extremely volatile and I would hate for your great trade to turn against you.

Disclosure: I am long AAPL; short AAPL October 22 415 Calls.