By David Gaffen
The equity market stabilized on Tuesday but only just barely – a 0.16 percent gain on the S&P 500 is nothing to write home about – but that the market bounced off support levels around 1,876 was notable enough.
One thing for sure is that the short-sellers are finally having their day in the sun after many years of walking around with a cloud over their heads, a la Joe Btfsplk from the L’il Abner comic (yeah, we’re busting out Depression-era references here), as Svea Herbst and Jenn Ablan reported in an overnight story.
One short bet the hedge funds have liked, but has yet confounded them, is Netflix, which reports results Wednesday and until recently had been resistant to any negative bets at all. That’s despite a valuation that can generously be called, er, generous, but one that Starmine sees as among its most overvalued on an intrinsic valuation perspective; it sees the stock as worth about $99 a share based on expected growth rates over the next decade, even though it has been trading around $450 or so.
Of course, a stock like this remains one based almost solely on expected growth – it has an enterprise-value-to-sales ratio of about 4, highest in the stock’s history and way ahead of its median 1.2 ratio in the last 10 years. Most of what’s being built into the stock’s valuation right now is the successful push it’s made with delivering original content like “House of Cards” and “Orange is the New Black,” both of which were big presences at this year’s Emmy Awards.
Riding that success, the company has announced several new films it will produce, including a “Crouching Tiger, Hidden Dragon” sequel and four Adam Sandler movies (okay, we can’t always account for taste).
Which, in a sense, makes Netflix a more typical media company, spending on the content which carries its own expenses but on a growing platform that’s just enough of a twist to keep the market fully invested in the story. It’s only recently the stock has started to pull back from the lofty levels it has seen all year, as part of a broader decline in the equity market, but it hasn’t been much – a $40 drop from the $489 peak that, compared to the woes of some other recent high-fliers, is relatively modest.
Short sellers have been largely washed out of this name, with Markit’s short interest data showing only about 6 percent of the shares available for short bets being used for such a purpose – that figure was at 40 percent at the beginning of 2013. It may be that the current ratios – a P/E of 73 on a forward basis – is too high, and won’t be sustained. And then the shorts will get back in and pounce on it after getting away from what’s been a losing bet for so long.
With the Fed pulling back from its monetary stimulus, plenty of weaker names will be washed out, and some overvalued ones will correct. Whether Netflix is one of those remains to be seen.
