The heavily shorted stock of Netflix (NFLX) is once more going to create some pain for the bears in the name this morning, after a surge last evening in after hours following its earning report. While gross margins were pressured, and the churn rate increased, investors are overlooking any warts due to outperformance on net subscriber additions. For instance, this quarter the company actually had less gross profit ($205M v $209M) than it had last quarter, despite revenue jumping $43M. When those type of things are ignored by the investor masses, that’s what drives a short nuts. Marketing expense dropped by nearly $20M this quarter, which helped the EPS keep growing.
In terms of guidance, Netflix is pulling an interesting tactic in terms of going much more vague go forward. Usually this is seen as a red flag but for now the company is getting the benefit of the doubt. As the company surpasses 20M subscribers, it will be important to move into foreign countries not named Canada to keep up the growth rate, as the law of large(r) numbers will begin to kick in. As with all growth stories, eventually a wall will be hit – deceleration of growth momentum begins – and the stock takes a beating. Only then will valuation truly matter. But the shorts in this name have been making that bet for quite a few quarters, only to be kicked in the teeth.
The stock is indicating $206 in premarket, with $209s being the 52 week high. EPS came in at 87 cents versus 71 expectation; at this premarket level the stock will be trading at 60x-ish 2010 earnings. 2011 estimates are just under $4.00; assuming they can beat that significantly and do $4.50, this is still a premium 45x forward estimates.
Full report here.
Disclosure: No position