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Einhorn Short Target Netflix Soars Despite Low US Subscriber Growth

Shares of Netflix Inc. (NASDAQ:NFLX), a David Einhorn (Trades, Portfolio) short target, traded higher in post-market trading on Tuesday on the heels of reporting revenue and earnings that surpassed analyst estimates despite domestic subscription growth missing analyst expectations.


For the quarter ending December 2019, the Los Gatos, California-based company reported operating income of $459 million and $1.30 in net earnings per share, compared with operating income of $216 million and 30 cents in net earnings per share in the prior-year quarter. Revenue of $5.47 million outperformed the Refinitiv consensus estimate of $5.45 million.

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Company reports lower-than-expected U.S. subscriber additions

Netflix CEO Reed Hastings said in a company shareholder letter that global paid net subscriber additions totaled 8.8 million during fourth-quarter 2019, on par with the net subscriber additions during fourth-quarter 2018 and outperforming the management forecast of 7.6 million. Despite this, net additions in the U.S. and Canada totaled just 0.55 million, with 0.42 million in the U.S., down from 1.75 million in the prior-year quarter.

The company said in the letter that key drivers of low membership growth included competitive launches in the U.S. from companies like Walt Disney Co. (NYSE:DIS) and Apple Inc. (NASDAQ:AAPL). Despite such launches, Netflix added that the transition from linear to streaming is "still in the early stages" and that it "has a big head start" in the streaming business. Further, the company said that Netflix's viewership per membership increased domestically and internationally year over year, with "The Witcher" receiving 76 million viewers during the first four weeks of the December 2019 release, on track to become one of Netflix's top season one TV series.

Stock trends higher in aftermarket trading as earnings beat offsets low domestic membership growth

Shares of Netflix traded at a post-market high of $345.89, rebounding from a post-market low of $332.77 and up approximately 2.30% from the close of $338.11 as the company surpassed top-line and bottom-line consensus estimates, offsetting the disappointing domestic membership growth.

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Einhorn, manager of Greenlight Capital, said in a shareholder letter that his fund increased its short position in Netflix: According to CNBC sources, Einhorn wrote in the letter that the fund "had been negative" on the company's prospects and that it increased the position in light of the company's late-2019 surge in share prices.

Einhorn further commented that Netflix's growth story is "busted" and that in future years, "additional credible entrants with deep content libraries" will further increase competition in the streaming industry as not every household will wish to subscribe to all services. CNBC added that over the next three months, AT&T Inc.'s (NYSE:T) WarnerMedia will launch HBO Max while Comcast Corp.'s (NASDAQ:CMCSA) NBCUniversal will roll out Peacock.

Company profitability remains strong yet stays overvalued

GuruFocus ranks Netflix's profitability 9 out of 10 on several positive investing signs, which include expanding profit margins and a 4.5-star business predictability rank.

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Despite strong profitability, Netflix's valuation ranks just 2 out of 10 on the heels of price-earnings, price-book and price-sales ratios underperforming over 93% of global competitors.

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Gurus like Andreas Halvorsen (Trades, Portfolio), Spiros Segalas (Trades, Portfolio) and Steve Mandel (Trades, Portfolio) have large positions in Netflix.

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Disclosure: No positions.

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This article first appeared on GuruFocus.