Tilson's Failed Netflix Analysis
The most vocal NFLX shareholder is Whitney Tilson who broadly proclaimed that he is long NFLX in 2011 after being short for most of 2010 and 2011.
Last fall, Tilson first started accumulating NFLX shares.
“Honestly, we’re looking at it as a potential long at this point,” said Tilson, when the stock was trading around $110/share two weeks ago. “We actually think that they’ve got real first mover advantages. One of their key pillars was very strong customer loyalty, which they’ve certainly tested. But now that they’ve rescinded this silly Qwikster idea, we think the company probably has a bright future.”
In early 2012, Tilson then explained his four reasons for being bullish on NFLX.
1. Street overreacted to the downside and nobody wanted it on the books at year’s end.
2. Rumors of buyout are swirling and with less than a $5 billion market cap; Netflix makes an easy acquisition for a number of large players.
3. Launched services in UK and Ireland, a real international growth story that nobody has paid attention to.
4. CEO Reed Hastings says U.S. subscriber growth is growing again.
Let's examine the NFLX earnings release to determine if Tilson's analysis was correct.
First of all, Tilson thought that the U.S. subscriber base was growing again. This appears to be incorrect and it is the root cause for the massive sell-off in the stock.
Netflix reported 23.41 million domestic streaming subscriptions, which surpassed the 21.67 million it had at year-end. It also hit within its January guidance for 22.8 million to 23.6 million, but fell short of Citigroup’s estimate of 24.17 million.
However, going forward the company sees domestic streaming subscriptions rising to a range of just 23.6 million to 24.2 million in the second quarter which essentially means that the company has stopped growing.
In addition, the international subscriptions are projected to be just 3.45 million to 4 million which means that Tilson's expectation that the UK would be strong was also incorrect.
Investors will not pay 25X earnings for a company that is projected to have little revenue growth in the quarters ahead. Tilson took CEO Hastings "word for it" rather than independently checking whether subscriber growth was still occurring.