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Whitney Tilson: Why We're Short Netflix

Whitney Tilson profile picture
Whitney Tilson


We've lost a lot of money betting against Netflix (NASDAQ:NFLX), which is currently our largest bearish bet, in the form of both a short and put position. In this letter, we share our investment thesis in depth and describe why, at a stock price of $178.50 and a market cap of $9.3 billion (based on yesterday's close), we think it's an exceptional short idea.

Given the natural inclination to talk about winners and quietly sweep losers under the rug, one might ask why we are writing about one of our worst investments. We have three main reasons for doing so: First, we think it's healthy to disclose and fully analyze our mistakes (although in this case we are not yet conceding that we've made a mistake in our analysis, but we obviously made a mistake in terms of timing our entry into the position). Second, it's a useful exercise for us - it helps clarify our own thinking - to put in writing our investment thesis, especially on complex and controversial positions (for example, on June 11th we published our 10-page analysis of why we were buying BP's stock amidst the panic at that time (it was then at $33.97 and closed yesterday at $43.86)). Third, we've found that when we publish our research, we often get valuable feedback. If there's information or analyses that would cause us to change our views, we want to hear about it!

And, no, contrary to what message board bulls will surely claim, we're not publishing our research in an attempt to salvage a bad investment by driving the share price down so we can exit at a better price. We are value investors, not traders, harbor no illusions about our ability to move markets, and our total capital committed to Netflix would not even place it among our top

This article was written by

Whitney Tilson profile picture
Whitney Tilson is the founder and CEO of Empire Financial Research, which aims to provide advice, commentary and in-depth research and analysis to help people around the world become better investors. In the year prior to launching Empire, he founded and ran Kase Learning, through which he taught a range of investing seminars around the world and hosted two conferences dedicated solely to short selling. Mr. Tilson founded and, for nearly two decades, ran Kase Capital Management, which managed three value-oriented hedge funds and two mutual funds. Mr. Tilson has co-authored two books, The Art of Value Investing: How the World's Best Investors Beat the Market (2013) and More Mortgage Meltdown: 6 Ways to Profit in These Bad Times (2009), was one of the authors of Poor Charlie’s Almanack, the definitive book on Berkshire Hathaway Vice Chairman Charlie Munger, and has written for Forbes, the Financial Times, Kiplinger’s, the Motley Fool and TheStreet.com. He was featured in two 60 Minutes segments in December 2008 about the housing crisis (which won an Emmy) and in March 2015 about Lumber Liquidators. He served for two years on the Board of Directors of Cutter & Buck, which designs and markets upscale sportswear, until the company was sold in early 2007. Mr. Tilson received an MBA with High Distinction from the Harvard Business School, where he was elected a Baker Scholar (top 5% of class), and graduated magnacumlaude from Harvard College, with a bachelor’s degree in Government. Mr. Tilson is an avid mountaineer – he has climbed Mt. Kilimanjaro, Mt. Blanc, the Matterhorn and the Eiger, and is currently training to climb the Nose of El Capitan. He also regularly competes in obstacle course races and is the two-time champion and all-time record holder in the 50+ age group at the 24-hour World’s Toughest Mudder, having completed 75 miles and nearly 300 obstacles in 2016. Mr. Tilson spent much of his childhood in Tanzania and Nicaragua (his parents are both educators, were among the first couples to meet and marry in the Peace Corps, and have retired in Kenya). Consequently, Mr. Tilson is involved with a number of charities focused on education reform and Africa. For his philanthropic work, he received the 2008 John C. Whitehead Social Enterprise Award from the Harvard Business School Club of Greater New York. He was a member (and, for two years, served as Chairman) of the Manhattan chapter of the Young Presidents’ Organization. Mr. Tilson lives in Manhattan with his wife of 26 years and their three daughters.

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Comments (286)

29 Oct. 2011

So right - too bad you did reverse your call for the wrong reasons.
Tony Pow profile picture
If you believe you're right, you need to be patient too.

You should cover the shorts,and enjoy the better things in life with the big profit.
sternmystic profile picture
Excellent thesis. Especially relevant considering the decisions int he last few months to seperate the DVD and streaming businesses, and then revoke that decision and now the rapid fall of stock price by ~40%
sternmystic profile picture
Excellent thesis. Especially relevant considering the decisions int he last few months to seperate the DVD and streaming businesses, and then revoke that decision and now the rapid fall of stock price by ~40%.
Andrew Shapiro profile picture
What does Hastings have on you - pictures? -
Netflix: Whitney Tilson Changes His Mind
James Duade profile picture
Prescient article. Too bad Mr. Tilson wasn't able to stay the course. To quote Keynes "The Market can remain irrational longer than you can stay solvent". A good call though, and one that should be praised.
Andrew Shapiro profile picture
Subscriber numbers in US have hit the wall. International tougher road.

Absent growth, with several quarters of losses facing Netflix valuation could trend as low as book value.

Does anyone realize that is <$7/share?

This is BEFORE >$2BN of OFF balance sheet debt. When netflix 10-Q comes out, and off balance sheet liabilities are disclosed, there will be increased talk of NFLX bankruptcy.
Great Analysis! Does NFLX has a concept of active users? Since this is a subscription, how many people are sleepers (the gym membership concept)?
Airelon Trading profile picture
I think it's sort of funny all of the comments showing up all of a sudden saying: He was right!

Drawdown folks.

Doesn't matter if you have a -56% dump if you had to endure an 80% rise ...

Simple drawdown
The Grid profile picture
Sorry guys but he wasn't right.

If he had just said, "Netflix is overvalued," he would be right. But he was early and his thesis was way off.
Where do you think the bottom is based on recent price action?
Great analysis. Looks like you were right.
porthos profile picture
great call--you were right. Starz worked out just as you postulated

Sorry you had to cover
Scootger profile picture
Bruce Whitaker profile picture
I respectfully submit your are wrong. To check your statement, run a NFLX chart with a "compare to" chart line for the S&P 500. You will see that there is almost no correlation between NFLX down days and the S&P, just as you will see that NFLX was jumping when the S&P was flat or only slightly changed. This disconnect has been going on for two years. I have been watching this stock (and many others) with minute by minute bar charts as well as daily charts for quite some time and know of what I speak.
The Grid profile picture
The movement up last year was leaps and bounds beyond anything that happened in 2009, and especially after getting extended by QE2 steroids
Scootger profile picture
AAPL for NFLX.....here it comes....AMZN forcing Jobs hand, watch out above,

Story already spreding all over wall street blogs.
Scootger profile picture
Kwonski....totally agree it will be down 50 one day, someday, but not today, and not tommorrow....could be coming soon if AAPL keeps cratering, but I will not bet on this, nor will anyone else, including Whitney "I ride waves" Tilson. Do yourself a favor and cover your NFLX short and buy RIMM on the Playbook being more popular than the Ipad for the med-to low end consumer--story of 2011, stealing serius share with ADBE flash inside.

We can always revisit the NFLX short thesis at 275-300 in the fall.
joey554 profile picture
Nice call scootger 3 days before NFLX tanks diwb ti $220 in hours. Stock on the way WAAAAAYYYYY down
The Grid profile picture
It's the leading stock in a broad market selloff. Of course it's going to go down.
Bruce Whitaker profile picture
Wrong! Netflix up until now has completely ignored the broader market and moved up counter to big down days. Those days are over. This is a sea change for NFLX. Wear rose colored glasses at your own peril.
O. Young Kwon profile picture
@ Scootger again - Thank you for your kind advice about "a month old" "short intyerest report."

Yes, I do expect "this stock is up 50 in a day," but I also expect this stock is down 50 in a day too.

As a long-term player as I told you, I am not worrying too much about short-term ups and downs, unless it is 10% up or down a day.

Thank you again.yk
Reeve Porter profile picture
you still solvent Tilson?
Scootger profile picture
Long NFLX--- again. Forced by ins thanks in part to WT covering(probably only (15-20k shares) his entire position have lanched her to new highs. I am sure a few other hedge funds are throwing in the towel and buying themselves in, and anyone following Jesse Livermore strategy of buying more of your winning positions and long hedge funds buying and squeezing the last put holders to zero. The interest shorts are paying to borrow this stock is increasing by the minute with clearing firms streetwide. Not "unborrowable" but it will feel like it if you are dumb/short for more than a trading day.

Kwon watch out, you are most likely reading short interest reports that are a month old. Using month old data in this game can cost you a bit of cash. They beat one more q and this stock is up 50 in a day. Risk reward is not there for shorts, yet.

The trend is your friend.
How many times did LIvermore go broke? I forget. BTW, he committed suicide in 1940 in the men's room of the Sherrry Netherlands Hotel. He wrote a great book. Left a sizeable trust for his family and apologized to his wife in his suicide note for being a failure. Without friends to loan him money after being wiped out he would have had no money to get back into the market--he would have died penniless. Livermore was a "plunger," not an investor.
Ricardo Espinosa profile picture
At least 4 times I think...don´t remember, read his book like 5 years ago.
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