Netflix 'Priced to Perfection': Hedge Fund

With the risk of Netflix missing analysts’ earnings estimates on the horizon, now is a good time for bearish bets against the movie-rental company’s stock, hedge fundNoster Capital said on Thursday.

Noster Capital said there was a “material chance” that the company’s 2011 earnings come in 20 percent below the current Wall Street estimate of $4.46 per share.

As a result, the stock could easily fall to $135 to $150, from the current level of $247, it said.

“While Netflix’s underlying business is sound, we believe that a short position in Netflix is warranted because the stock is priced to perfection,” Noster Capital said in a note sent to CNBC.

The hedge fund said Netflix’s current valuation assumes a “near-perfect growth trajectory of the company’s earnings over the medium-term”.

It said the current valuation did not allow for any risks to materialize, and therefore recommended shorting the stock.

Short sellers borrow shares of a stock and sell them at the current price, hoping to buy them back at a cheaper price later when they are returned to the lender.

Jim Cramer said many investors did not consider high-growth companies like Netflix overvalued, arguing that the influx of money is more important to Wall Street than what these companies say or do. In turn, money managers are willing to pay up for what they perceive as high-growth stocks, Cramer said.

But Noster Capital said the current valuation is “hardly a valuation that anyone should be buying any security at – unless we believe we found the next Apple or Microsoft . But Netflix is not it.”

The hedge fund also warned competition was intensifying.

Competitors such as Comcast and Apple faced few, if any barriers to entry in the movie rental business and posed a real threat, it said.

“Competitors will not sit and watch Netflix take the whole pie, and to make matters worse the competitors coming to this party are serious and much better capitalized than Netflix,” Noster Capital said.

In addition, content providers have already expressed their dissatisfaction with the current terms Netflix has contracted to distribute their films, the hedge fund said.

“Expect much tougher prices going forward. This can only lead to margin compression as we don’t believe Netflix will be able to keep adding as many subscribers if they try to pass on the increased costs to their clients,” it said.


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Noster Capital has a synthetic short position via options in Netflix. It entered into the position after the company's latest results.