Business

Short seller makes case for Netflix tumble

Netflix is at the center of a Wall Street tug of war, and whoever wins stands to make a boatload of dough.

For months, the high-flying movie rental service has defied the predictions of short sellers who believe it is poised to fall. Netflix shares have nearly quadrupled in the past year to $180 and trade higher than most traditional media companies.

Now, one well-known short seller is making a case against Netflix. T2 Partners, a New York hedge fund run by Whitney Tilson and Glenn Tongue, has issued a 22-page thesis called “Why We’re Short Netflix.”

READ: Why We’re Short Netflix (PDF)

Tilson is good friends with Bill Ackman, the founder of Pershing Square Capital Management who is known for detailed presentations describing why he believes certain companies will rise or fall.

Tilson opens his Netflix thesis with this admission: “We’ve lost a lot of money betting against Netflix, which is currently our largest bearish bet, in the form of both a short and put position.”

“So why on earth would we be betting against this stock? In short, because we think the valuation is extreme and that the rapid shift of its customers to streaming content (vs. mailing DVDs to customers) isn’t the beginning of an exciting, highly-profitable new world for Netflix, but rather the beginning of the end of its incredible run. In particular, we think margins will be severely compressed and growth will slow over the next year.”

To be sure, the debate over Netflix is expected to only intensify in the coming months. Already a number of short sellers have abandoned their positions because the stock just refuses to give.

Indeed, even the sudden departure of the company’s CFO last month – never considered a good sign – did little to dent the stock.

When asked recently at a conference why he was leaving, departing CFO Barry McCarthy said he would like to run his own business. He also gave shortsellers some words of advice about Netflix.

“I’m not sure you’d want to be short this quarter,” he said.