First, Whitney Tilson announced that he has covered his significant short position in Netflix because his thesis has changed. Quoting Keynes he asked: When the facts change, I change my mind – what do you do, sir? Tilson:
In mid-December, we published a lengthy article on why Netflix was our largest bearish bet at the time. With the stock up nearly 25% since then, one might assume that we’d think it’s an even better short today, but in fact we have closed out our position because we are no longer confident that our investment thesis is correct.
I think Whitney had it correct the first time when in an email he countered Netflix CEO Hastings’s defense of Netflix:
If we were to summarize the main thing lacking in Hastings’s letter and nearly all of the bullish-on-Netflix emails we’ve received, it’s that there’s no discussion of valuation – they would read the same if the stock were trading at 15x earnings or 75x earnings…but from our point of view, that 5x valuation gap is the difference between a great long and a great short.
Tilson published his rationale for his short of Netflix on December 16. Since then the stock is up 27% including a dramatic 15.2% jump on January 27 after NFLX’s earnings were announced. That must have been very difficult for Tilson to take given his already substantial losses, and it is a better explanation for covering NFLX so soon after his strong analysis of the short opportunity. Short covering is also a likely explanation for the continued rise in NFLX’s price. We’ll know more after the quarter.
We think Tilson may regret covering now. Even if the company can miraculously grow earnings by 20% per year for the next eight years at current margins, NFLX at today’s price will still be trading at a very aggressive 18-times earnings. This is an asymmetric bet in favor of the shorts.
The second article that relates to NFLX is a research paper written by two economists and summarize on Reuters. The conclusion is in the title:
In placing stock bets, listen to the shorts: study