I've lost thousands of dollars shorting overhyped growth stocks in my day....
From those painful losses, I learned a very valuable, and expensive, lesson: never short on valuation. Instead, the key to making money shorting growth stocks is simple... wait for the growth story to die. And that's precisely the situation we have in shares of Netflix (NASDAQ:NFLX) today.
I'll revisit this analysis in depth as the trade evolves, but here's the bottom line: the old days of growing subscribers with its unique business model are over. You see, Netflix pioneered the business of offering cheap and compelling streaming content. For good reason, few other companies tried replicating the business model of selling $1 worth of content for $0.80. The lack of competition and a compelling value for consumers allowed Netflix to amass a huge following, despite the negative returns on capital it generated.
And for years, short-sellers (including yours truly), tried betting against the company on the obvious signs of an unsustainable business model - including the incessant cash burn and its soaring debt load:
Of course, none of these things mattered so long as the growth story remained intact. And that brings us to the opportunity we have today. The Netflix growth story is on the verge of collapse, as fierce competition enters the fray. I'm talking about the likes of Hulu, HBO and soon-to-come Disney and AT&T to name a few. Netflix is no longer the only game in town. And it's starting to show up in the numbers...
In Netflix's latest earnings results reported after the close today, the company reported subscriber growth of just 2.7 million - a miss of nearly 50% from the Street's consensus of 5 million. Worse, the company reported it actually lost 100k subs in the U.S. versus expectations for a 300k gain. And, of course, with Netflix losing the rights to both Friends and the Office - two of its most popular pieces of content - there's no reason to expect a big rebound in growth going forward.
Meanwhile, the new competition will prohibit Netflix from meaningfully raising prices and reaching profitability. So with the growth narrative destroyed, and no visible path towards profitability, what's the floor on a stock that loses money on every sale and hopes to make it up on volume? And what hope does Netflix have of ever repaying its mountain of debt?
Even with the stock down 10-15% in the after hours, I feel very comfortable shorting here now that the growth story appears to be ending. I see no reason why investors will step in to support this stock anytime soon.
Here's the trade I'm making in the after hours tonight:
APS Trade #7: Shorting 10 shares of Netflix (NFLX) at $315 per share.
I'll look to add short exposure on a decent bounce above $320, and will provide ongoing updates as the position evolves.
Thanks for reading and good trading!
Disclosure: I am/we are short NFLX.