NEW YORK (TheStreet) -- The renowned and often controversial economist John Maynard Keynes said a mouthful when he pronounced: ""Markets can remain irrational longer than you can remain solvent."With the mania in shares of Netflix ( NFLX) going full bore after its earnings report on Wednesday it's time to reconsider that oft-forgotten quote. Whether you agree with Keynesian economics or not, if you've been an investor or trader in the stock market you can hardly disagree with it. Shares of NFLX are up 43% in two trading sessions after the reaction to its after-market earnings announcement. This appears to be a "short squeeze" situation, and I'm reminded of one of Jesse Livermore's favorite books "Extraordinary Delusions and the Madness of the Crowd" by Charles Mackay. Traders may be chasing the stock while those who were short NFLX are covering on heavy volume. NFLX had a surprisingly positive quarter but not enough to justify such irrational exuberance. It's not that NFLX's earnings skyrocketed or that it is anywhere near reaching the levels of success that a company like Apple APPLE ( AAPL) has experienced for years. When one compares NFLX, with a market cap of less than $8 billion, with a gigantic cash generator like AAPL with a market cap of nearly $434 billion, a rational investor has to wonder why AAPL shares are down while NFLX is soaring. On a timely note, TheStreet's Jim Cramer said in an interview today that he still likes NFLX but he also sees that the price has gotten ahead of itself. When a company like Apple can report a relatively positive quarter as it did on the same day and in after-hours trading be taken out to the woodshed, something is seriously irrational. Today, AAPL shares traded down as low as $450.66, even though AAPL is trading at only 8 times forward (one-year) earnings. That's outrageously cheap, and at a price of even $460, its dividend yield is 2.3%. Apple's revenue for the quarter was $54.5 billion compared to $46 billion, an increase of $8.2 billion year-over-year. AAPL has no debt and tons of cash.
The results announced Wednesday served as a resounding endorsement of Netflix CEO Reed Hastings, who has been spending heavily to license more compelling movies and TV shows in hopes of warding off intensifying competitive threats.
Companies such as Amazon.com (AMZN) and Coinstar's (CSTR) Redbox have expanded into streaming video to Internet-connected devices to compete with Netflix.In respect to Hastings' strategy, it's been met with understandable skepticism and yet it has done quite well. But did it really pay off that much during the final three months of last year? This is starting to smell like deja vu all over again! Remember the overpriced high-flyers from the recent past like First Solar ( FSLR) and Chipotle Mexican Grill ( CMG)? We know what happened after they went ballistic. When I warned about them being overpriced, many commented that I didn't understand. Oh, but I do understand why companies become overpriced and how lucrative shorting operations can set the stage for a massive price run-up followed by a big fall.
Its cash from continuing operating is a big issue, and so is the debt load. On a positive note its still has ample levered free cash flow. Yet, the buying frenzy in NFLX shares over the past two days can't be fundamentally justified by the numbers and the company's comments. The AP article sited above described it this way, "Investors were euphoric. Netflix's volatile stock soared $36.24, or more than 35%, to $139.50 in extended trading after the numbers came out." Thursday's rally drove share prices intraday up 40% to as high as $149.17, and that's when the selling (I suspect short selling) kicked in. The article continued, "It would also mark a nearly 80% increase since the company's early December announcement of a licensing deal with Walt Disney ( DIS) for exclusive streaming rights to new movies beginning in 2016." The two-day surge in Netflix's stock has been a gigantic windfall for billionaire investor Carl Icahn. He began accumulating close to a 10% position in NFLX in early September when the stock was trading below $55. This is a big payday for Icahn! My question involves whether the upside reaction to NFLX's earnings and Hastings' comments involves a short squeeze that will be followed by a rational program to begin to short the stock at these outrageous levels? Yes, the two million-plus increase in new subscribers in the fourth quarter gives Netflix something close to 27.1 million U.S. subscribers for its streaming $8-per-month service. Yes, as CEO Hastings said, he believes the U.S. streaming service eventually will have 60 million to 90 million subscribers, although the fact is he hasn't even established a timetable for reaching that goal. Hastings and the Board of Directors don't know how long it will take to win that many subscribers.