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Netflix Burns Shorts as ‘Extreme’ Bearishness Ebbs

·4 min read

(Bloomberg) -- Investors who bet against Netflix Inc. in recent months might now be licking their wounds.

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Shares of the streaming giant have surged about 50% from their May low, buoyed by the promise of new features to revive growth, better-than-expected quarterly results and the runaway success of the latest installment of sci-fi thriller “Stranger Things.”

That’s hurting short sellers, who borrow shares and sell them, hoping to buy them back at a lower price to profit from the difference. Since mid-May, they have seen $996 million in mark-to-market losses, according to S3 Partners.

At its May low, Netflix was down 72% for the year as the company faced mounting competition, customers whose finances are getting pinched by rising inflation, the possibility of a global recession and the end of the pandemic-fueled streaming boom.

“Bearishness was extreme,” said Neil Campling, head of technology, media and telecom research at Mirabaud Securities. “The stock got to extreme oversold levels, and traded at a massive discount to trend valuation, to peers, and to history.”

To be sure, with the stock still down 59% in 2022, shorts that have been bearish since the start of 2022 are still sitting on $2.69 billion in mark-to-market profits, according to Ihor Dusaniwsky, managing director of predictive analytics at S3 Partners.

The recent rally in Netflix’s shares reflects optimism about the start of a much-anticipated version of the streaming service that will carry advertising, a crackdown on password sharing and better-than-feared second-quarter subscriber loss. The company also forecast growth in its subscriber base after two quarters of contractions.

Bears who gave up on their bets may have added fuel to the surge. In the past month, short sellers have bought back about 2.4 million shares worth $599 million, according to S3 Partners. That’s an 18% decline in the total amount of shares shorted as Netflix rallied.

“Netflix shorts have been actively trimming their short exposure after the most recent earnings call -- looking for the worst to be over and for this quarter to reflect better earnings and\or user growth,” Dusaniwsky said.

Netflix shares are still cheaper than usual after their rebound. They’re priced at about 22 times profits projected over the next 12 months, well below the 10-year average of 80 times. The Nasdaq 100 is almost at 24, while the S&P 500’s price-earnings ratio is 18.

Others are bracing for some volatility as competition concerns and rising costs aren’t going away any time soon.

“This stock can do very well over the next 12 to 24 months, but there will probably be a better entry point in the fall,” said Matt Maley, chief market strategist at Miller Tabak + Co.

Tech Chart of the Day

Tesla Inc. shares have rallied about 48% from the lows touched in late May. George Soros’s investment firm added a new $20 million position in the electric-car company, according to a regulatory filing on Friday. The shares, which are down about 11% this year, rose in early trading Tuesday.

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  • Tencent Holdings Ltd. plans to sell all or much of its stake in food delivery giant Meituan to appease Beijing and lock in profits, Reuters reported, citing four sources with knowledge of the matter.

    • Shares of Meituan and other Tencent investees plunged on the news. Meituan slid more than 10% in Hong Kong, while Kuaishou Technology fell more than 5% and Bilibili Inc. dipped as much as 4.7%.

  • Twitter Inc. was ordered to hand over files from its former consumer product head to Elon Musk on spam and bot accounts the billionaire has cited in seeking to abandon his $44 billion purchase of the social media company.

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(Updates share price moves throughout.)

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