- Hedge funder David Einhorn doubled down on his short position in Netflix in late 2019.
- Einhorn is one of the Tesla short-sellers who incurred massive losses as the stock rallied.
- Heres why Einhorn is about to suffer another embarrassing loss.
One of Teslas most notorious short-sellers has Netflix stock in his sights.
Greenlight Capitals David Einhorn is bearish on Netflix (NASDAQ:NFLX), boasting that the streaming giants open-ended growth story is coming to an end. He warns that the stock is about to suffer a reckoning.
Einhorn revealed that Greenlight is adding to its NFLX short position.
But after already suffering a brutal loss during Teslas (NASDAQ:TSLA) historic short squeeze, the hedge fund manager may only be setting himself up for more embarrassment.
Here are three reasons why Greenlight will regret that Netflix short.
#1. Netflix will weather the competition.
Einhorn argues stiff competition in the streaming war will constrain Netflixs growth prospects. But if its recent earnings report (PDF) is anything to go by, growth may slow a bit but the credits wont roll anytime soon.
Even after the entry of Disney+ and Apple TV+ in Q4, Netflix still managed single-digit revenue and subscriber growth in the U.S. Internationally, the number of subscribers expanded 9% quarter-on-quarter.
Altogether, Netflix added 8.8 million subscribers year-over-year a rise of 20% against Wall Street estimates of 7.9 million.
Foreign markets remain Netflixs best bets for expansion, but it has wiggle room to grow domestically. Its cheapest plan costs $8.99 per month, while Disney+ and Apple TV+ cost $6.99 and $4.99, respectively.
Investors wouldnt like it, but plunging into a price war could help Netflix expand its market share.
#2. Netflixs in-house content library is growing.
Netflix claims The Witcher may make history. | Source: Katalin Vermes / Netflix via AP
Einhorn further claims that Netflixs original content lacks staying power. He says Netflixs in-house library cant offset the exodus of binge-friendly shows like The Office and Friends, which are heading to NBCUniversals Peacock and WarnerMedias HBO Max services, respectively.
The loss of The Office and Friends will deal a blow to Netflix. But if subscribers leave, theyll miss out on the platforms burgeoning library of exclusives, which includes must-see shows like Stranger Things, Ozark, Money Heist, Narcos, The Crown, and The Witcher.
The Witcher, for instance, is on the verge of becoming the biggest season one TV series ever, with 76 million households streaming the show during its first four weeks after its release.
#3. Its free cash flow position is improving.
Netflix bears often point to the companys debt load problem to justify their apocalyptic forecasts.
But based on the latest earnings report, the streaming firms free cash flow in FY2020 is expected to improve to -$2.5 billion from -$3.3 billion in FY2019.
NFLXs free cash flow problem should improve in 2020. | Source: Netflix (PDF)
If this trend continues, Netflix will be on the path to funding new content organically. From the companys shareholder letter:
With our FCF (free cash flow) profile improving, this means that over time well be less reliant on public markets and will be able to fund more of our investment needs organically through our growing operating profits.
This is not the time for Netflix to rest on its laurels. Its rivals are either flush with cash (Apple), a rich content library (NBCUniversal), or both (Disney).
The company must secure sustained future growth, which will prove most difficult in the lucrative domestic market.
But unfortunately for NFLX bears like David Einhorn and Greenlight Capital, the $140 billion tech giant is up to the challenge.
Disclaimer: This article represents the authors opinion and should not be considered investment or trading advice from CCN.com.
This article was edited by Josiah Wilmoth.
Last modified: January 22, 2020 7:20 PM UTC