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NFLX - Valuation and Shorting
On GuruFocus, a poster writes about why he didn't short NFLX at 50: http://www.gurufocus.c...
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I agree that shorting on valuation alone is not a good idea. That's why I skip over a lot of stocks that otherwise look shitty. But let's not kid ourselves either, an euphoric valuation is a sure sign that a stock is ready for a drop at the slightest disapointment. I think NFLX at 50 may have looked overvalued to some, but the market didn't have the euphoric element we are seeing now. I think a lot of the more bean-counting, strictly value-investors found on GF kind of miss out on the more qualitative sendiment indicators.
I think that at this point, NFLX has reached or is damn near saturation in its business. It has had a favorable regulatory and technological environment to grow in so far, but I think its fast growth will run out of gas sometime this year due to constriction on those two fronts. IMO its business model is rather silly these days, actually, with Redbox and OnDemand as emerging competition.
Today I opened a small short position in the following: NILE, NFLX, MILA, AMZN and BIDU. I covered CTRP today for a (very) small profit because although I still think a POS lurks under its glossy coat, looking at the reaction to BIDU's earnings last night made me think CTRP might have another leg on it yet, and it's not as overvalued as BIDU, MILA, or NILE anyway. I'm keeping my short on HMIN.
These new positions are rather small so I will not feel panicky if they run up in price. But I'm confident that at some time between now and a year from now, the prices on these securities will be markedly lower than they are presently.
Not just the qualitative indicators, but some of the bean counters (including the OP of that NFLX post) don't use metrics such as PEG that take into account future growth estimates. At $50, NFLX might have had a PEG of around 1 (I don't know). Now it's closer to 2, which seems expensive despite the growth.
Nice day for your DV short today.
Thinking about our e-mail conversation re stops, I wonder if it might make sense to modulate them based on your view of market frothiness. I.e., if you think we're due for a correction in the next month or two, then you might want to use wider stops so you don't get shaken out before the bust.
Just remembered that we discussed the dangers of shorting NFLX on valuation alone on Short Screen long before Tilson came around to that view (as Forbes reports today: http://bit.ly/gWmP9E ).