Netflix Inc.’s chief executive officer publicly asked a hedge-fund manager today to stop betting against the company, a lesson that many investors already have learned.
“It is possible that one could make money shorting Netflix today,” CEO Reed Hastings, whose movie-rental company has moved to online delivery from DVDs, wrote in a posting on the Seeking Alpha website. “But shorting a market-leading firm as it is driving a huge new market is a very gutsy call.”
As the CHART OF THE DAY shows, Netflix’s short interest -- the number of shares borrowed and sold in anticipation of lower prices -- peaked in April 2008 and has dropped by more than half since then. Short interest was 11.1 million shares at the end of last month, less than half its high of 23.2 million.
Hastings responded to a report by Whitney Tilson, a co-founder of T2 Partners LLC, that Seeking Alpha published four days ago. Tilson wrote that Netflix was his largest bearish bet and he would stick with the holding, consisting of short sales and options, even though it has been a money loser. Netflix’s stock, depicted in the chart, has more than doubled this year after surging 84 percent last year.
The shift toward streaming movies online marked “the beginning of the end of its incredible run,” Tilson wrote, as the company’s growth rate and profitability are poised to fall. He described the stock’s valuation as “extreme” at 67.4 times earnings and 4.6 times sales.
Hastings called Tilson “a great investor” and noted that they both provide financial support to the Knowledge Is Power Program, or KIPP, a nationwide network of charter schools.
“I am writing this open letter for him to try to get him to cover his short now,” the CEO wrote. “My desire is to increase his odds of making money next year so he can donate even more.”
(To save a copy of the chart, click here.)