Netflix to Trigger the ‘Chanos Rule’?

Any company showing fast growth ultimately hits a level of “all in,” or what I like to call the Chanos Rule — named after short-seller Jim Chanos.

AP

Netflix

This is when a product hits the point when everybody who really wants to have one has one — and the rest of the growth is either fill-in, replacement or gifts.

As Chanos has told me numerous times over the years, the magic number before growth starts slowing or stopping is when a growth company sells (or in the case of subscription-driven business, enrolls) between 25 million to 30 million units (or subscribers).

Examples include Spectrum Brands' George Foreman Grill , LeapFrog’s LeapPad , Cabbage Patch Dolls and, more recently, Green Mountain’s Keurig brewer.

Oh, and HBO, which peaked at 30 million subs (not another 10 million from Cinemax).

This gets us to Netflix. Last quarter the company boasted 30 million total customers, which includes streaming and DVD; 23.9 million customers subscribed only to the streaming service.

Either way, that gets close to triggering the Chanos Rule.

Just today, Consumer Edge Research said it believes Netflix’s “membership levels” may have peaked last quarter, with indications of slowing household penetration. And ComScore’s September traffic data for Netflix shows 28.7 million unique users, a meager 2.6-percent gain from a year earlier — and that's against an easy comp, when when Netflix changed pricing.

For the third quarter, ComScore showed a 2.6-percent drop in traffic suggesting that the company’s web traffic may have peaked at around 28 million to 30 million.

Rich Greenfield of BTIG told me on Tuesday that he doesn’t believe Netflix and HBO are necessarily the right comps because HBO was hampered by being put on top of a much bigger cable bill.

The key, he said, is whether Netflix’s original programming works. If it does, he says, the brand could wind up being redefined — pulling in many more subscribers. If not, “they may not be growing much past where they are now.”

In which case, the Chanos Rule will have struck again.

-By CNBC's Herb Greenberg

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