Netflix Kills Shorts, But Gains May Not Last

Netflix is still in a precarious spot, with super-thin margins and looming competition from Amazon

   

In late November, it looked as though Netflix (NASDAQ:NFLX) was destined for oblivion as the stock reached a low of $62.37. Keep in mind that just a few months earlier, it was over $300.

Since then, Netflix has staged a mighty comeback. And yes, it got a nice boost from yesterday’s Q4 earnings release. The shares are up 23%, to $116.94 — the biggest move in two years.

The key was that Netflix has been getting its subscriber mojo back. In the quarter, it signed up 610,000 customers, putting the total at 24.4 million (the prior quarter had seen a loss of 800,000). This will certainly help to boost cash flow, which is sorely needed.

Yet investors need to be extremely cautious. According to an analysis by Data Explorers, short interest in Netflix spiked 38%, to 12%, in the past month. (Shorts are investors who profit when a stock falls.)

However, they run the risk of a short squeeze. This means that investors often scramble to unwind their positions when there is positive news on a stock — which adds to the buying pressure. So it’s a good bet that a meaningful share of Netflix’s stock surge has come from this.

On a fundamental basis, Netflix is still in a precarious spot. It will take time for it to recover from its disastrous recent moves, such as the attempt to split its streaming and DVD-delivery businesses.

Netflix’s price hike could also continue to be a problem. After all, Amazon.com (NASDAQ:AMZN) is expected to launch its own streaming service in the U.S. With its huge distribution footprint — which now includes the Kindle Fire — Amazon could be a worthy competitor. Even more important, Amazon has shown that it can be brutal with its pricing.

This is crucial since margins are only 11% on Netflix’s streaming business. Interestingly, margins on the DVD business are 52%. But according to CEO Reed Hastings, the segment customer count will “decline every quarter…forever.” Keep in mind that the DVD business is a key source of cash flow.

Then there’s Apple (NASDAQ:AAPL). The company has a huge cash hoard and needs to find more growth opportunities. Might it use its resources to lock up content? And won’t this further drive up content cost, which is already expensive for Netflix?

It’s true that international markets represent a big opportunity and should be a driver of long-term growth. Already Netflix has made inroads into Latin America and the U.K. However, it is far from clear what the level of customer adoption will be. It might not be on the scale seen in the U.S.

If so, the international strategy could be a big drag on Netflix.

Tom Taulli runs the InvestorPlace blog IPO Playbook, a site dedicated to the hottest news and rumors about initial public offerings. He also is the author of “All About Short Selling” and “All About Commodities.” Follow him on Twitter at @ttaulli. As of this writing, he did not own a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, http://investorplace.com/2012/01/netflix-kills-shorts-but-gains-may-not-last/.

©2014 InvestorPlace Media, LLC

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