Shorting Netflix taught me a serious lesson: Trader

The Netflix rally has continued unabated, with a 50 percent rise in the stock since the start of April. And that has left those short the richly valued name licking their wounds.

"It was a very painful experience," admitted Boris Schlossberg, a trader who was short the name for a year and a half. "And I think the key takeaway here is that you can never, ever, ever short a stock on pure valuation concerns alone."

By most measures, Netflix is indeed expensive. The stock is trading at a forward price-to-earnings ratio of 278, which is a gargantuan premium to the S&P 500's arguably rich P/E of 17 and change.

A comparison of the top-line to the share price hardly makes it more reasonable, as the stock has a forward price-to-sales ratio of 5.1. That means investors would theoretically prefer to have 1 percent of Netflix's shares than 5 percent of its total sales over the next year.

Of course, that's because investors expect to see massive growth for the company, as it expands its reach internationally and perhaps charges each customer more without itself paying much more for the content it is showing.

With so much emphasis placed on an uncertain future, the name has naturally become divisive among analysts and investors alike. One bearish analyst even went so far as to compare himself to a Keanu Reeves character, given that like Neo, he is "the only person who sees the matrix."

Read MoreSuper-bullish Netflix call draws analyst's ridicule

Netflix
Andrew Harrer | Bloomberg | Getty Images

Schlossberg apparently also saw the matrix, as he shorted the stock "on the supposition that they were grossly overvalued and their growth rate does not justify their valuation."

Yet a year and a half later, Schlossberg decided to take the blue pill, as it were.

"I still think it's overvalued. But eventually I realized that it didn't matter," he told CNBC. In fact, Schlossberg was wise enough to exit the stock three weeks ago, saving himself from further losses.

The trader maintains, however, that it will soon make for an excellent shorting opportunity.

"What really needs to happen is a miss of sequential revenue or a miss of subsequent subscriptions. Something that could really blow the stock up 20 percent in a day. And at that point, that's when it's going to become a really good short because a lot of air is going to come out of the name," and fast.

Only then would it be safe for shorts to try their luck.

"Wait until it does go wrong," Schlossberg advised. "You'll miss the initial drop, but you'll be safer and much, much better off by following on after the negative news hits."


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