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David Einhorn: Is It the Right Time to Short Netflix?

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Famous hedge fund manager David Einhorn made a profit in his short-position on Netflix (NFLX). He discussed the profit in a letter to investors, according to a Bloomberg report on Wednesday. David Einhorn is the founder and president of Greenlight Capital.

He was referring to the put options held in the third quarter. In the same quarter, Netflix shares fell 27.1%. On a year-to-date basis, Netflix’s stock prices have risen just 7.4% as of Thursday. Meanwhile, the S&P 500 Index has risen 21.2% during this period. Based on yearly gains in 2019, the company’s stock prices have the lowest gain after 2016. In 2016, the stock prices had risen 8.2%. Since Netflix’s listing day on May 23, 2002, investors’ wealth has grown 22,268%. The calculation only includes the company’s hare price movement.

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Einhorn: Netflix’s problems are rising

According to Bloomberg’s report, Einhorn said in the letter that Netflix is “yet to demonstrate a profitable business model.” He isn’t the first person to question Netflix’s business model. Barclays analyst Kannan Venkateshwar highlighted a possible overvaluation in Netflix’s stock prices, as reported by CNBC on September 23. On the same day, the company’s stock prices have fallen 30% on a year-to-date basis.

Venkateshwar said, “Overall, our methodology does suggest that if Netflix’s present business model is held constant, the stock is very expensive relative to its TAM.” TAM refers to the total addressable market. He said that “revenue per user” and “customer turnover” are crucial to the company’s business model. While the former has to increase, the latter has to decline for a sustainable business model, according to Venkateshwar.

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In the third quarter, Netflix surprised Wall Street with a better-than-expected EPS. The company’s revenues increased around 30% from the third quarter of 2018. The EPS beat analysts’ mean estimate by 41.3%. To learn more about the company’s key financial metrics, read Five Things We’ve Learned from Netflix’s Earnings Report.

Besides, George Soros’s Soros Fund Management exited all of its Netflix holdings in the second quarter. In the previous quarter, Soros Fund had 50,000 Netflix shares. To learn more, read Netflix: Soros Exited Even before Barclays’ Warning.

Moving averages

On Thursday, Netflix’s stock prices closed at $287.4. Currently, the stock is around 26% below its 52-week high. On Thursday, the stock prices were 3.6% and 2% above their 20 and 50-day moving averages. On October 17, the company released its second-quarter earnings.

As we discussed earlier, better-than-expected earnings might have pushed the stock prices above these short-term moving averages. However, the 100 and 200-day moving averages at $311.40 and $334.29 are strong resistance zones for the stock prices. Since July, Netflix’s stock prices haven’t decisively moved above these long-term moving averages. Technically, weakness in the stock prices could have contributed to Einhorn’s gains.

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Einhorn’s holdings and famous bets

Einhorn is a known Tesla bear. However, the recent rise in Tesla’s stock price might be a concern for the hedge fund manager. Tesla’s stock prices rose 30.7% in October.

Earlier this year, CNBC reported that David Einhorn discussed AerCap and GATX at Sohn Investment. He said, “Neither has consumer-facing businesses, and both have terrible news. AerCap operates in a growing industry with a favorable outlook.” At the same event, he announced a long position on AerCap and a short position on GATX. So far in 2019, GATX and AerCap’s stock prices have returned 5.7% and 2.6%, respectively, as of Thursday. 

In the second quarter, General Motors (GM) was Greenlight Capital’s largest holding. General Motors accounted for 16.7% of the total portfolio in the same quarter. In the previous quarter, General Motors accounted for around 24% of Greenlight’s total holdings. Einhorn has exited a considerable portion of General Motors stocks. However, any downside in the stock prices could impact Greenlight Capital. On a year-to-date basis, General Motors’ stock prices have risen 11.1%. Greenlight Capital’s stock prices have risen 25.3% during the same period. Read General Motors: Good News and Bad News to learn more about the company’s fundamentals.

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