Greenlight Capital’s David Einhorn sent out on Tuesday his fund’s annual letter to investors saying he’s shorting Netflix stock on the premise that “the company’s domestic market has matured”, and that Los Gatos “risks an unfavorable change in net neutrality rules”, which were put in place in 2015 to make sure broadband carriers treat all legal content equally, rather than charging consumers different rates based on the Internet service provider and type of content being delivered. Trump’s transition team — which oversees the media, cable, and telecommunications industries and which is being led by two lobbyists from the telecom industry — is reportedly pushing for a proposal that would see the Federal Communications Commission lose its consumer protection and competition powers. And if that materializes, it will certainly be a minus for the company.
Einhorn also wrote in his letter that Netflix is poorly positioned in terms of taking advantage of Trump’s policies, particularly tax cuts on corporate profits which will target a reduction rate of 15% from 35%.
“Bubble basket stocks mostly don’t have profits, which makes them unlikely to benefit from corporate tax cuts,” Einhorn said, adding that “an accelerating economy should allow investors to find growth without needing to pay nosebleed prices for a narrow group of profitless top-line growth stocks.”
Netflix operates on relatively thin margins which challenges its profitability. This due to global expansion efforts as well as the high costs of acquiring original programming. In 2016, the company, despite generating only $75 million of net income on $2.29 billion of revenue in Q316, announced plans to spend around $6 billion on new content and release over 1,000 hours of original productions in 2017.
Einhorn’s comments prompted Netflix, Inc. (NASDAQ:NFLX) shares, which have jumped nearly 7% this year while spiking 27 over the last 52-weeks, to drop more than 1 point today, trading at $131.65 as of 12:56 p.m. ET.
On the positive side, Netflix is set to report Q416 earnings after the bell today. Wall Street is expecting a strong quarter from the name with $2.47 billion in revenue, a 35% year-over-year jump, and EPS of $0.13, $0.01 higher the $0.12 per share posted last quarter.
If we get stellar earnings numbers, expect notable moves higher from the issue. In fact, ticker has been forming an intermediate-term range that could resolve to the upside if the stock breaks above mid-$133 level. The next pivot to watch after that is $135. As always, for momo traders, it’s prudent to book some profits after a big move. Trim and trail. That said, if we get an earnings miss, a break below $130 could sent the stock lower. Keep your stops.