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Netflix CEO Reed Hastings Responds to Whitney Tilson: Cover Your Short Position. Now.

Dec. 20, 2010 12:50 AM ETNetflix, Inc. (NFLX)396 Comments
Reed Hastings profile picture
Reed Hastings

A great investor and a wonderful human being, Whitney Tilson recently posted an article about why he is short Netflix (NASDAQ:NFLX). Whitney, who is a major co-donor with me to charter public schools like KIPP, writes that he has lost money betting against Netflix, and that he is still short Netflix in a big way.

At Netflix we mostly focus on building our business and letting the numbers do the talking. But Whitney is such a big-hearted donor to causes that I care about that I am writing this open letter for him to try to get him to cover his short now. My desire is to increase his odds of making money next year so he can donate even more to the charter public schools that we both think are important to our country’s future. For the record, I think short sellers are a positive force in capitalism, and I acknowledge that CEOs are generally biased in their bullishness on their respective firms.

Whitney’s core short thesis in his article “Why We’re Short Netflix” is:

In particular, we think margins will be severely compressed and growth will slow over the next year.

This is the natural outcome of his view that:

We don’t believe that Netflix has a better business model, better management or a meaningful competitive advantage in the business of streaming movies and TV shows.

Whitney lays out a series of potential issues for us: Our CFO’s recent resignation; threats to the First Sale doctrine for DVDs; internet bandwidth costs potentially increasing; declining FCF conversion; market saturation; weak streaming content; paying more for streaming content; and increased competition hurting margins. He only has to be right on one or two of these issues in 2011 for him to make money on his short of Netflix.

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Reed Hastings profile picture
Reed Hastings is CEO of Netflix Inc.

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Comments (393)

Code Talker Market Analysis profile picture
Netflix just kept falling.
O. Young Kwon profile picture
The article is the classic to exchange jabs between the attacker (Whitney Tilson) and the defender (Reed Hastings) twelve years ago.

Netflix had been one of my three tigers (BIDU, CMG, and NFLX) which had provided me a significant amount of capital gains in 2010. As a "LONE" (Long Only and No Edge) I supported the defender because Short Sales (SS) are not on my ball park. I don't do "MOS" that are Margin, Options, and SS.
O. Young Kwon profile picture
@O. Young Kwon

I have made some Short Sales (SS) on NFLX in 2010-11 but currently a long/momentum only trader. In my earlier investing time, I took margin loans, and the option positions – calls and puts. Now, I'm long only (LO) investor.

(a) No SS

In my view. LO investors hit a single or double as many as possible in a long run, while SS traders try to hit a few home runs as many as possible in a short term. The latter wants to get runs as much as possible - up to four runs. As a result, the former ride a smooth ascending road while the latter bump a sharp Edge - shooting or plummeting.

(b) No Margin

My mother-in-law gave us $20,000 in the early 1990. I invested the money in Charles Schwab. I bought a number of equities, paying $35 for commission. Then I tried to have a gain selling my holding by paying $35 again. $70 for two commissions ate my gain every trades. At that time, we need money so badly so margin loans were added. A market correction came along and margin calls easily wiped out my holdings completely within a few days. My wife didn’t say a word. A few months later she advised me not to take margin loans!

(c) No Options

During the 2000s, I traded options, paying a significant commission, at Trade King (which is not today). The major problems of calls or puts are: (a) I have to buy call options only because put options are short sales. (b) Predicting the market anywhere between three months to one year is impossible to me. Most call positions were expired so I concluded options are waste money.
Longbow Archer profile picture
A very nice time to revisit this as it will prove to be a wonderful time to accumulate more shares.
Panther Investments profile picture
this is amazing in retrospect - we need more CEO long pitches
@Panther Investments even more so now.
Exile of the Mainstream profile picture
Well it was 2010 before SA became Yahoo message boards 2.0
robiniv profile picture
What on earth is the CEO of a public company doing here?
jthom3 profile picture
Good read.

I'm not sure what PR firm this fellow Tilson uses, but they're doing a hell of a job. His results are Terrible.
Exile of the Mainstream profile picture
Where do you see his results?

I believe he has outperformed the SandP no? Notwithstanding the fact, he is a long/short fund, so in a rising market that's tough, + He is value-focused and that's in the worst period of unfavourability!
jthom3 profile picture
-In 2011, a flat year for the overall stock market, hedge fund manager Whitney Tilson was down 25 percent.

-By 2013, he had separated from his investment partner, relaunched Kase Capital

-February's investor letter saw him tell investors he'd "hit the reset button" in September 2016 due to "poor performance" and "my feeling out of sync with the market and finding few bargains."

-Kase was down about 8 percent this year, according to Dow Jones, while the S&P 500 has gained about 12 percent."

Constant losses and 'resetting' his performance isn't investment talent. PR has kept him going, and he has just now finally thrown the towel in. It was indeed PR keeping alive, CNBC should know.

Exile of the Mainstream profile picture
Wow, I didn't know this article/letter existed. Reed Hastings probably made/saved Whitney Tilson a few million dolllars lol.
20 Sep. 2011
All of the comments above are fundamental musings. Both sides are purely subjective. I would point Netflix traders to a weekly chart. The 200ema is at 120.74 and the 61.8 % fib from $17.9 lows to $304.79 highs is at 127.49. So a long trader would watch for confirmation on the daily. A descending trend line break upward with volume would be a good indicator.
Wyatt Junker profile picture
I prefer reverse axehandles & descending staircases when reading chicken entrails myself.

I mean... musings.
The Grid profile picture
Dude everyone knows that reverse axehandles stopped working with the Fed in the market, use staochistic pilum charts set against a sheep dung macro analysis backdrop and you can't go wrong.
Adam Aloisi profile picture
Reed, I think you need to apologize to Whitney. The only thing you were successful in was scaring him out of his short. I could address your entire article here, but I don't think it's worth the time.

You've overestimated yourself and your company and it's coming back to haunt you. Good luck.
The Grid profile picture
His short was busted before Reed ever said anything.

The fact of the matter was that Netflix was the leading momentum stock in Federally sponsored and INSURED liquidity runup. Whitney's short thesis is still garbage, and he was early.

The ONLY short thesis that STILL makes sense is that Netflix was OVERVALUED, and overvalued by a mile.

Whitney still needs to either prove that Netflix really does "slow the internet down," or come up with his own apology.
Gabriel Kaplan profile picture
I wonder what will happen in a month (Earnings release Oct 19, 2011) "60% rise in fees" vs. xyz% turnover rate

It seems unrealistic that Netflix will lose > 30% of subscribers.
In the long run Netflix will continue to gain customers on a global basis.
@Adam Aloisi Looks like netflix won out, ten years later.
Michael Eisenberg profile picture
45 minute Interview with NFLX CEO Reid Hastings at WSJ's D9 conference. Reid is fantastic. At minute 35 I asked him about his open letter on Seeking Alpha to Whitney Tilson telling him to cover his short and whether he thinks CEOs should publicly address the "shorts" like he did. www.marketwatch.com/vi...
You have been in the sphere of greatness but you can't get his name right - Reed not Reid.
Wyatt Junker profile picture
Looks like Tilson caved & covered a little prematurely.

Such is the life of a short.
Casino Mogul profile picture
NFLX is a sucker bet.

Once Starz goes away their streaming content is garbage.

The content owners have smartened up & will now punish NFLX with brutal streaming content acq fees.

I wouldn't buy NFLX at $100/share.

NFLX won the DVD battle, but will lose the digital war. They don't have the money to compete with the megatech firms.

Time to buy some puts!

I love the pontification on Starz but you couldn't be more wrong. Starz makes up less than 10% of Netflix' content and since deals with Epix, NBC/Universal, ABC/Disney, it no longer makes up anywhere near the best content. Starz has good content but it doesn't have a hold over Netflix that bulls seem to think. Netflix is clearly better with Starz but they no longer need Starz.

Good luck with your puts, you'll need it.
joey554 profile picture
Biobat you are the one who is incorrect Starz makes up nearly 50% of Netflix content. Especially the disney content. That deal signed with ABC/Disney only covers a couple tv series from ABC Family and a few others. The movies are distributed by Starz
Rob Fagen profile picture

Don't use made up numbers, please. Especially ones that I've already corrected for you on another discussion thread.

The last look I had, Starz has about 2,500 titles. Of those titles, Netflix has other contracts that allow availability of 1,500 of them. Starz's contribution is about 1,000 titles out of the 11,000+ (or 10,500+ if you take out Criterion early). Lose Starz, and you're down to around 10,000 titles, or about 2x Amazon's initial offering. Add in the CBS deal and you're well over 10,000 (maybe even up over 11,000 again).

You've actually made some well considered replies in the past. I'd like to see that continue, since it benefits both the long and short sides of the discussion.


Casino Mogul profile picture
NFLX will be a shell of itself in 3 years.
Ever hear of Porter's 5 forces.

The content owners will punish NetFlix with brutal streaming fees.

I can't believe people are buying this company @ $220+.

Watch what happens when the Starz deal goes away in a couple months. People will soon realize their content offering is garbage without Starz.
The Grid profile picture
Good luck shorting QE2
NYC Trader profile picture
If you really believe NFLX will go down, you should play a calendar spread. Sell a near-term put option (i.e. Jun 11 $200 strike) and buy a Jan 12 put option (also 200). Ends up costing you $1400/contract and your risk is not too bad. As long as NFLX can stay above 200 before June and starts falling after, you'd profit handsomely. I'd say that is safer than shorting.
Well Tilson has just announced that he covered his short so 1 point for the CEO
David Pinsen profile picture
Forbes published an article today quoting Whitney Tilson on the dangers of shorting NFLX based solely on valuation. We discussed the dangers of that on Short Screen last April: shortscreen.com/messag...
frugalandpuzzled profile picture
Obsoleted !
I suspect NFLX will start raising prices again when the momentum in subscription growth begins to slow. We don't know what will happen regarding competition, but I think most competitors are refusing to attempt to compete on price. There was an interesting report this weekend on a gaff at AMZN where AMZN appears to be contemplating offering free streaming as an adjunct to a broader subscription service. www.geek3.com/articles.../

While I have a great deal of respect for Hastings, I continue to believe that the company's insistence that it wants subscribers to go pure streaming and get out of the DVD rental business is an absolute falsehood. Try looking up a specific genre (for instance Vietnam War) if you are a streaming only subscriber and you will be offered several titles unavailable for streaming if you upgrade your account to unlimited DVDs for an additional $2 per month. If NFLX wants to get out of the DVD rental business, why ask users to "upgrade" their accounts?

NFLX is a good company with a good product (although for man users, streaming has a lot of hiccups and glitches) which is being rewarded with customer loyalty for being a first mover and low cost alternative to cable TV. Look for annual price increases, just as the cable companies did, if NFLX continues to hold a dominant market share.
The Grid profile picture
I believe we are at a fundamental turning point where DVD's are now being obsoleted, in the same way that VHS was made obsolete by the DVD.

This transition may take a few more years, as content providers ramp their streaming selections back up to match what is already available on DVD.

The main driver of this in 2011, is the Internet TV. These sets have built-in wireless connectivity and the apps that connect into services like Netflix are really well done.

Before getting internet onto the living room tv took some effort (complex and often expensive), now it is seamless, and the delivery of this product is simply amazing. At some point I believe consumers will expect internet access to be available on the TV, and at this point it becomes a commodity.
A CEO knows more than anyone about his company, right? If he knows that his company all that good, why would he be concerned if others are shorting his stock?? shouldn't he be happy, cause the short and the facts will push the stock higher??
Historically, when CEOs start defending their companies; know for sure that the company is heading for troubles.
I can't tell wether NFLX is a good short at this level or not, and no one can answer this, but all i know is that NFLX has to grow at 20-30% for the next 10 years to make todays prices fair...
Thats 10 years without a single miss!!!
simple calculation:
if they grow at 25% for 10 years their earnings per share would be around $ 28 per share. Pricing the $28 per share at 20 P/E will lead to $559 share price.
The compounded return if you invest in NFLX at todays price of $218 would be 9.87%
Well its your choice wether to go long or short the stock...
JaaS profile picture
28 Jan. 2011
- CFO - gone
- Forward guidance kept to the absolute minimum
- Manufactured EPS beat based on lower marketing expenses (while all other expenses increased), and tax rate decreased from 41% to 37%; with no explanation provided???.
- CFO propped up by increases in A/P, Other Assets/Liabs, and Deferred Revenue
- CEO that responds to short sellers publicly (a la Dick Fold, Jeff Skilling)

...all this before you even start to identify some of the fundamental headwinds, and declining margins...this is a joke
Dialectical Materialist profile picture
"this is a joke"

I'm glad you put that disclaimer at the end of your comment because it was starting to sound like you were intentionally misrepresenting the very strong state of the company and their very healthy earnings. I mean for example painting the departure of the CFO who had done a bang up job and was headed for greener pastures as some sort of black mark on the company was really stretching credibility. But since you were only joking...
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