I'm going to save everyone the obvious joke about Netflix
releasing a show called House of Cards as their stock price defies gravity and
continues to float on a cloud of hopes, dreams, and Carl Icahn's influence. But seriously, how sweet an irony it would be
if a show titled House of Cards marks the top of Netflix? I'd have to rank it amongst one of the
funnier things to happen on Wall
St. in quite a while. I will make my argument for shorting NFLX on
several fronts; fundamental, technical, and "seriously, its trading at
what and I can short it?!?!" common sense.
The fundamental case is as follows. NFLX currently has a P/E of 632.1. No, that's not a typo. NFLX is trading at six hundred and thirty two
times its current earnings. So what are
its current earnings? That would be a
whopping 29 cents per share. Their
current profit margin is hovering around 1%.
So unless their next big idea is the cure to cancer I think they might
be slightly overvalued.
The technical case is just as simple. Markets love Big Round Numbers. NFLX failed perfectly at $200/share. It also is stuck in no-man's-land between the
50% and 61.8% retrace from its July 2011 high and July 2012 low. Often times failure to reach the full 61.8%
retrace is a sign of significant weakness.
Lastly, volume has been steadily decreasing as the stock has churned
sideways for the last month.
And now here is the common sense argument. First, not many people are willing to wait
for physical DVD's to arrive in the mail anymore. There are way too many other options such as
Redbox, Blockbuster Express, MoviesOnDemand, etc. So that mean's that NFLX is relying on its
streaming inventory. Have you seen the
choices available to stream on their site?
Its possibly the most pathetic collection of movies I've seen. I dare you to find ONE person who loves the
There are about ten movies
worth watching which brings me to my next point. NFLX offers the first month of streaming FOR
FREE. So watch every episode of House of
Cards and a few movies then cancel. It
only costs 29 cents less than their EPS…as in free. Also, I'm not going to even comment on how
bad SilverLight is as a streaming vehicle (its beyond awful). Sure there are companies that don't charge
for their service (FB) but NFLX has to pay fees and royalties for their
content. Lastly, NFLX's customers are
beyond fickle; remember what happened last time they increased monthly fees by
just $1? I fail to see one good thing
about NFLX as a service or a company.
No matter how one looks at it, NFLX at $183/share makes zero
sense. So I have to short it. The risk/reward simply is too nice to pass
up. Stop the position out above $200,
let it ride back down to a double digit stock.
Simply the stock is a House of Cards (sorry, couldn't help myself).