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Netflix, Inc. (NFLX) Message Board

  • shattererofwords shattererofwords Jul 6, 2003 8:23 PM Flag

    Here's what's going to happen: Update 1

    Well here NFLX sits at $27, and all of the conditions that I observed at $10 are still in place. NFLX has almost tripled, and the short interest is HIGHER than when I first made that post.

    I assumed in January that the hedge funds had a lower tolerance for loss than they have shown that they have. As expected, NFLX quickly ran to $20, largely on retail covering imo. This run made a lot of the hedge funds "average up" by shorting a whole ton of NFLX around $20 - $22.

    They then attempted to engineer a technical breakdown of NFLX by painting for a double top. They hired fear mongers in major magazines (barrons, forbes, etc) to bash NFLX to assist in this engineered breakdown of the stock. It culminated in Wal-Mart's announcement of their DVD service, where NFLX broke its 50dma and on the surface looked like it was breaking down. I wondered aloud in a post the day of that drop why there was net ACCUMULATION on the breakdown day. The entire event was a theatrical event in an attempt to get longs to dump their shares. I believe that some of the smarter hedge funds used this event to unload a significant part of their holdings. However, stupidity and groupthink reign on Wall Streen, and more hedges shorted into this weakness, entirely ignoring the tape that said "this is an engineered, false breakdown. beware." Many retail investors were probably knocked out by this pullback.

    And then NFLX announced its patent, and the world changed entirely. The core premise of the fundamental short that NFLX had no moats around its castle was, in a single press release, destroyed. None of the large hedge funds are willing to bet their big bucks on the offchance that Wallmart or others could draw out a legal battle. A patent of the scope that NFLX now has turned the entire fundamental argument on its head. (I personally believe that the premise was faulty anyway, even WITHOUT a patent. There are tons of examples of Davids with word-of-mouth growth taking on Davids.)

    NFLX trading has been fun for months. Because of the large short interest, all of the technical levels are amplified. By this, I mean that whenever a significant level is breached, you have a large number of shorts and longs acting in the same manner, doubling the strength of any major move. Up until a couple of weeks ago, the hedge funds have managed to contain NFLX movement by providing supply at major technical levels. They managed to cut down the stock in the final hour of trade daily for at least a few months.

    However, over the past week I've noticed a very notable change in the trading winds. The shorts simply aren't acting together into the close to contain the price. See, hedge funds when they want to get out of a stock do best by working together to technically control the stock price. They need to keep momentum/day traders away, because when you've got thousands of little mosquitoish traders pecking away at the ask, they can quickly eat up supply provided by the shorts. By controlling the price by selling shares at critical levels, hedges could drop the price and then cover very slowly and carefully.

    continued..

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    • I've been liquidating my store and putting the money in nflx. It's been a Nice ride so far. I see the future of the industry going to home delivery with NO LATE FEES. So far NFLX and TIVO are the best delivery methods.
      Late fees are one of the major reasons for customers hating the video store experience. But necessary in a brick & mortar store for profitability. There is no way to purchase enough copies to satisfy all your customers in the first (2) weeks without studio deals where the average dvd only rents 2-4 times. NTFX has deals with the studios which allows them to have alot of copies of the current HOT TITLE with no risk. Hopefully they will keep the studio agreements and not buy New Release DVD's because the cost of the DVD's will at least double in the next year or two.

      I like NFLX for the wide selection of older titles. These hopefully they buy and do not share any of the huge profits with the studios.

      HUGE profit in DVD's! I know! But I don't expect DVD's to stay LOW PRICED. Studio contracts will keep nflx profitable when DVD prices go up. I guarantee they will go up alot! Average video tape was $70 wholesale!

      • 1 Reply to videoadventureinc
      • The brick & mortar rental companies are duplicating the single-fee (no late fees) model. Other companies are "literally" duplicating the mail delivery with little more than a different color scheme and lower prices. Netflix have very strong word-of-mouth and momentum and early mover status. They also have excellent marketing. But will all of this be enough? Probably enough to maintain a decent business, a huge hit is more questionable.

        Unlike other huge hits like eBay, there is no virtuous cycle (aka law of increasing returns) to fuel dominance. There is also a low barrier to entry. NFLX needs to win on service (can be copied), marketing (can be copied), reputation (their best asset).

    • > Davids with word-of-mouth growth taking on Davids

      er I meant Davids taking on Goliaths. David taking on himself doesnt make much sense ;)

      SOW

 
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