Whitney Tilson has covered his infamous short of Netflix (NFLX). As we suspected last week, Tilson’s Netflix short was simply inflicting too much pain on the fund manager.
In an open letter to shareholders and the media, Tilson outlined why the fund has covered the short position.
“In summary, while we acknowledged in our December article that Netflix “offers a useful, attractively priced service to customers, is growing like wildfire, is very well managed, and has a strong balance sheet,” we now believe that it is an even better business than we gave it credit for. The company has enormous momentum and substantial optionality (for example, international growth), and management is executing superbly. In particular, we tip our hat to Reed Hastings, whom we had the pleasure of meeting last weekend. In addition to his success building the business and navigating the transition from DVD-by-mail to streaming media, he’s also one of the most down-to-earth, honest and straightforward CEOs we’ve ever encountered.”
However, another famous short seller, Leonard Brecken is more skeptical of the honest of Netflix management. Brecken has accused Netflix of overstating cashflow.
“The accounting issues from the second quarter to the third quarter to the fourth quarter have gotten worse. The company is overstating it’s cashflow net income. This company grew their topline by 30%. Accounts payable rose well over 100% to completely wipe out the cash flow for 2010.”
“The fact of the matter is this company is not generating any free cash flow from their businesses if you adjust the accounts payable and adjust for the fact that they are under amortizing on their their net income side their content costs.”
Brecken has also accused the company of playing “accounting games.”
“I think they’re playing accounting games here. I think it’s gonna catch up with the company. I think it’s going well under $70.”
Brecken thinks that subscriber growth is going to plateau in the second or third quarter of this year at which point he expects Netflix to miss it’s revenue numbers because the 18-35 market will be saturated.
The other issue that Brecken noted was the incoming competition from Amazon.com. Brecken thinks that Amazon.com will enter the streaming space in “weeks, not months” and that will “freeze subscriber growth” and that is how Netflix will miss their numbers.
It appears that Brecken’s short position is far more defined than Tilson’s in that Brecken has an idea of the catalyst that will sink the stock. He also has a guess as to when the problems might come to the surface.
Comments on this entry are closed.