On paper, it's one of the best short candidates you will find. Netflix has almost everything a short-seller could ask for.
Netflix is a well-liked, which tends to propel some stocks higher, because of less-than-intelligent money confusing a fantastic product with a compelling investment thesis. Buying stock merely because you like a product is one of the quickest ways to lose money.
NFLX Debt Issued Net Quarterly data by YCharts
That's just foreplay, though; the most salient reasons why Netflix is attractive, and indeed irresistible, to many shorts are its income and balance sheets. Netflix trades at a brain-freeze trailing multiple of more than 500 -- and more than 70 based on forward earnings estimates. Adding to the Netflix short temptation is more than $3 billion in off-balance sheet liability that continues to increase in tandem with increases in debt issues. Netflix's struggle with free cash flow creates such short-selling intensity that almost one out of every four shares is shorted.
NFLX Cost of Goods Sold Quarterly data by YCharts
In a nutshell, Netflix has the most seductive power for short sellers since John Malkovich in Dangerous Liaisons. However, it's a mistake to short it and I will explain why. Intuitively, you may assume that I will sing the praises of management and what a marvelous job they are performing adding shareholder value yada, yada, yada, but nothing could be further from the truth. Reed Hastings crushed it with DVD in the mail, but that's so 1990s. Today Netflix is a Web site with millions of subscribers offering the following top three-subscription levels: