As a follow-up to the analysis we posted on July 18th, on 20th December we announced to our subscribers that we had closed our short position on a temporary basis. The decision was two-fold.

  1. The share price had fallen materially, in line with our forecasts, from US$380 to US$266 (representing a 30% drop over the period, or higher once exchange rates are taken into consideration); and
  2. Based on an analysis of Google search trends conducted by Piper Jaffray’s Michael Olson and released in a note earlier this week, Netflix could see accelerated subscriber growth for the fourth quarter equivalent to 11.5% year-over-year growth domestically versus a 10% consensus. And internationally, PiperJaffray’s model points to 46% growth. While there’s room for error in the search index model, Olson noted, it shows a “high likelihood of a strong Q4 for Netflix domestic sub adds,” with international growth in line with expectations.

1. and 2. combined with the potential for a broader market recovery, following a near 20% correction, should trade talk narrative point to progress being made, were sufficient justification for us to close out the trade on a temporary basis.

Notwithstanding all that, we still believe that Netflix does NOT represent good value given the factors contained within our July 18th report (viz levels of debt, combined with >100 P/E – still representing a massive disconnect from sensible values).  As such, we will look to re-enter the trade following clarification after January 17th earnings are announced and potentially wait until the market has priced in the success, if any, of upcoming trade talks between China and the U.S.A.

In closing this note, we would commend Netflix for their recent popularity of shows but caution investors to consider that this is probably to be expected given the amount being borrowed and ‘invested’ in content creation (refer to our notes comparing valuations of Netflix and Disney here to understand what we think would represent a more sensible valuation:

Merry Christmas all – here’s hoping 2019 is great for you all.