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Shorting Netflix Is Portfolio Suicide

Streaming options:

  • 1. $7.99 for all you can watch videos, streaming only; six devices connected, capacity to view on two devices at the same time. Or $11.99 streaming only, six devices connected, with viewing on four devices at the same time.
  • 2.
  • 3.

Netflix has about 30 million subscribers, recently surpassing Time-Warner's HBO (TMX), and yet they continue to only offer a one-size-fits-all, lowest-common-denominator model for pricing. Netflix may offer two or four devices at once, but they are both the same content offerings. No pay per view, no premium, no customization.

If Netflix didn't have the potential for greater monetization, the company would be a "grab with both hands" type of short opportunity; but it does, and you should assume that the potential will continue, which is what causes short sellers to wake up in the middle of the night with cold sweats.

Netflix shares gapped up and continued to move higher after Carl Icahn disclosed his long position, because when Icahn walks into the Los Gatos offices of Netflix, he's the smartest guy in the room.

You can bet (as many clearly have) that Team Icahn will not stand for Netflix collecting only $8 a month when subscribers are willing to hand over much more, if only asked. Netflix's capacity to increase its client-base monetization makes the stock extremely dangerous to short.

Increased per-subscriber revenue potential isn't a number listed on the balance sheet, but clearly the potential exists.

As soon as Netflix fills in the No. 2 and No. 3 blanks of its top offerings, the current valuation models will get turned upside down. That's why the smart money can look past an otherwise bleak race to the bottom under the current model of one-price fits-all.

If you want to buy, do so only on pullbacks, because of the amusement park-like volatility, but from one short-seller to you, don't even think about shorting until after Carl Icahn has left the building.

At the time of publication the author had no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

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