Let Whitney Tilson Invest In Netflix; I'll Pass

| About: Netflix, Inc. (NFLX)

I don’t get it. The Wall Street Journal reported that Whitney Tilson sent an e-mail to the paper, saying his fund was buying shares in Netflix (NASDAQ:NFLX). Tilson's T2 Partners previously had a short on Netflix, squandering its profitable long positions as losses on the Netflix bet grew. Tilson wrote that:

It’s been frustrating to see our original investment thesis validated, yet not profit from it. It certainly highlights the importance of getting the timing right and maintaining your conviction even when the market moves against you. The core of our short thesis was always Netflix’s high valuation. In light of the stock’s collapse, we now think it’s cheap and today established a small long position. We hope it gets cheaper so we can add to it.

I sent a message to Tilson's Seeking Alpha e-mail account (he is also a contributor on this site) on September 2, 2011, but he did not reply. Netflix closed at $213.11 on that day:

September 2

Hi Whitney,

I track T2 and your letters, and admire your long term performance.

Howard Marks once said that being right at the wrong time is the same as being wrong. A couple of quarters ago, you were short Netflix, so as it rose your timing was wrong. With NFLX now altering its pricing structure and unable to a sign deal with Starz (the CEO said it's just 8% sales), it looks like your thesis is playing out.

Wouldn't you be interested in being short NFLX again, rather than to abandon that play?

Disclosure: No position on NFLX.


Netflix closed at $77.37, down $41.47 and 34.90% at time of writing, on October 25. Netflix stock now sports a P/E of 19.59, and a forward P/E of 12.62. With a market cap of $4.07B, Netflix has a book value per share of $6.35 and $7.16 in cash per share. Tilson’s return as of September 30 was -27.10% YTD.


Value investors are notoriously good at generating paper losses for many years before a thesis plays out correctly, netting substantial gains. There are many problems that have yet to play out with Netflix, even with the substantial decline in share price.

First, Netflix is now seen as the poster child of corporate greed. The company repurchased shares and reported higher profits in its most recent quarter, highlighting this perception. CEO Hastings will have to leave before customers reverse their perceptions on Netflix.

Second, the DVD and media streaming business should not have been separated at the same time prices were increased. Netflix will need to reverse its price hike or sweeten the online content to stem what may be a permanent decline in the number of customers.

Third, Amazon (NASDAQ:AMZN) is aggressively commoditizing tablet devices in an effort to grow video content subscriptions. Amazon reported earnings on October 25 and an operating margin of just 0.7%. That Amazon is willing to take an up-front loss in the short term for many quarters to come will hurt Netflix in the long run. As Amazon builds its customer base, the company can enjoy fat subscription margins. Amazon will be in a position to negotiate content deals that are more favorable than for Netflix, further hurting Netflix shareholders.

Bottom Line:

Netflix is another trader’s stock that will move with speculation. The only upside at this time is speculative: a QE-like solution in Europe may earn a few points in return. This macro catalyst appears to be the only positive for Netflix shares. Few investors are successful in making macro calls. Investors who believe they can make macro calls may trade Netflix. Anyone else would be better off looking for true value plays.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.