Switch off the TV and short Netflix

Netflix's rivals are investing heavily in content, making the streaming pioneer’s life harder. Traders should go short.

Last October, I suggested that you short the online streaming service Netflix (Nasdaq: NFLX). This proved to be a mistake: six months later I recommended that you cover your position at a loss. Indeed, if you'd bought Netflix in late December when it was $234, and sold when it was around $380 earlier this month, you would have made a return of over 60%. However, after a disastrous quarterly earnings report Netflix's shares have fallen to $310, their lowest level since January. So is this a buying opportunity, or is now the right time to bet against the streaming service?

The reason why the latest quarterly-earnings figures have hit Netflix's share price so hard was not disappointing revenue or earnings. In fact, both figures were largely in line with expectations. The real shock was that Netflix added only 2.8 million new subscribers, as opposed to the 4.8 million people analysts were expecting. What's more, the number of American subscribers actually fell by 126,000, compared with an expected increase of 352,000. This is important because Netflix needs to keep growing at a rapid rate to justify a valuation of 55 times 2020 earnings and 4.5 times sales.

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Dr Matthew Partridge
Shares editor, MoneyWeek

Matthew graduated from the University of Durham in 2004; he then gained an MSc, followed by a PhD at the London School of Economics.

He has previously written for a wide range of publications, including the Guardian and the Economist, and also helped to run a newsletter on terrorism. He has spent time at Lehman Brothers, Citigroup and the consultancy Lombard Street Research.

Matthew is the author of Superinvestors: Lessons from the greatest investors in history, published by Harriman House, which has been translated into several languages. His second book, Investing Explained: The Accessible Guide to Building an Investment Portfolio, is published by Kogan Page.

As senior writer, he writes the shares and politics & economics pages, as well as weekly Blowing It and Great Frauds in History columns He also writes a fortnightly reviews page and trading tips, as well as regular cover stories and multi-page investment focus features.

Follow Matthew on Twitter: @DrMatthewPartri