Back in May, ten days before the end of that month’s savage sell off on Wall St, I suggested selling a Cannabis Index on the basis that it was likely to lead the market down and lag any gains in the other direction. I am pleased to say that despite the rip-roaring June to-date rally in the US markets, the IG Cannabis Index is now lower than it was at the end of May. It is still an outstanding sell here (the level on the IG Cannabis Index is 904 but I am sure there are others). Following the same reasoning, I think Netflix (NASDAQ - NFLX) is an excellent short after a recent fall…
This is in that a market sell-off would put huge further pressure on the shares and I believe its increasingly tainted model means it is likely to lag a market melt-up. I used to avoid shorting Netflix because I love it and subscribe for the price of a bottle of Good Ordinary Claret from Waitrose per month (call that £6) and feared that all it needed to do, if push came to shove, was to add £2 (a 33% increase) to the monthly bill which everyone would happily pay and the bears would get killed as profits soared. Well it did hike prices a while back and the share price continued soaring, but it looks like that game is over now. A Q2 release just showed net new subscribers of half the company’s forecast at 2.7 million and in the US they fell as did the EPS ($0.65) against Q2 18 ($0.85).
Unlike Disney and Apple who are about to enter the VOD space, Netflix has no other source of income to pay for the content it produces and so must keep issuing eye-watering amounts of debt to keep the show on the road. This is unlikely to change any time soon as the content providers who currently rent their titles to Netflix are unlikely to continue to do so when the contracts expire as they will want to keep them exclusive to their own new streaming services.
As with many pioneers, it is looking increasingly like a case of first mover disadvantage as the well-heeled competition arrives on the horizon, blunting the only two weapons in Netflix’s armoury; subscriber growth and price rises. As I write it trades at $323 - a trailing 12 month PE of 127 - and, in my opinion, makes the perfect companion to the Cannabis short as hedged exposure to the US sell off when it arrives.
This article first appeared on the N50 website which Tom Winnifrith runs with Steve Moore & Lucian Miers. To access the website - where TWO share tips from Tom & Steve went live on Friday and there's a new shorting piece from Lucian this week - click HERE
Filed under: Netflix, Woodford, Atom Bank, Rockhopper Exploration, Carclo, IQE, N50 website
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