Today I noted Whitney Tilson's T2 capitulated on NFLX shorts. Below are the extracts from the letter.
In mid-December, we published a lengthy article on why Netflix was our largest bearish bet at the time. With the stock up nearly 25% since then, one might assume that we’d think it’s an even better short today, but in fact we have closed out our position because we are no longer confident that our investment thesis is correct.
1) The company reported a very strong quarter that weakened key pillars of our investment thesis, especially as it relates to margins;
2) We conducted a survey, completed by more than 500 Netflix subscribers, that showed significantly higher satisfaction with and usage of Netflix’s streaming service than we anticipated (the results of our survey are in Appendix A, attached); and
3) Our article generated a great deal of feedback, including an open letter from Netflix’s CEO, Reed Hastings, some of which caused us to question a number of our assumptions.
In summary, while we acknowledged in our December article that Netflix “offers a useful, attractivelypriced service to customers, is growing like wildfire, is very well managed, and has a strong balance sheet,” we now believe that it is an even better business than we gave it credit for. The company has enormous momentum and substantial optionality (for example, international growth), and management is executing superbly. In particular, we tip our hat to Reed Hastings, whom we had the pleasure of meeting last weekend. In addition to his success building the business and navigating the transition from DVD-by-mail to streaming media, he’s also one of the most down-to-earth, honest and straightforward CEOs we’ve ever encountered.
Based on the data provided in the T2 letter, I upgrade my target of NFLX to 235.
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