Oh, if only Whitney Tilson had listened to Netflix (Nasdaq: NFLX) CEO Reed Hastings sooner.

"Shorting a market leading firm as it is driving a huge new market is a very gutsy call," Hastings wrote in an open letter to the publicly short and fellow charter-school donor Tilson. "On balance, I would rather have my co-philanthropists on the long side of this particular bet."

Netflix's stock has gone on to soar nearly 30% since Hastings' mid-December advice. Tilson and his fellow shorts were already smarting plenty before that. Netflix's stock has been a 10-bagger over the past four years.

In other words, it eats shorts for breakfast.

The stock's gains since early last week won't be stinging Tilson anymore. He has now covered his short position.

Bear essentials
"We have closed out our position because we are no longer confident that our

investment thesis is correct," Tilson wrote on Wednesday.

He had actually met with Hastings a few days earlier, but the company's blowout holiday quarter and a favorable customer satisfaction survey also helped sway the once-vocal bear.

It was hard to poke too many holes in Netflix's fourth-quarter report. Gross margins slipped, but net and operating profit margins widened sequentially. The company was also able to tack on a record 3.1 million subscribers during the quarter, mollifying concerns that Netflix wouldn't be able to beef up its streaming content without sacrificing either marketing or margins.

This doesn't mean that all critics have been appeased.

"I think they're playing accounting games here," Brecken Capital's head Leonard Brecken said on CNBC on Friday. He feels that Netflix isn't appropriately amortizing its streaming costs, ultimately leading to a share price that will fall to well under $70.

Earning its keep
Brecken isn't the only one who feels that Netflix is overvalued.

Hastings himself agreed with Tilson back in mid-December that his stock's valuation was "substantial." Shares are obviously even more expensive now.

However, Hastings was advising Tilson to cover his short because it's hard to make money betting against a company that has a bigger moat than cynics may think.

There are plenty of companies beginning to cash in on the smorgasbord model.

  • Comcast (Nasdaq: CMCSA) is now letting its subscribers access streaming content on channels that they are already paying for through its Xfinity service. It's at the heart of the TV Everywhere movement that Comcast and Time Warner (NYSE: TWX) have been trying to get off the ground for nearly two years.
  • Amazon.com (Nasdaq: AMZN) is rumored to be adding a streaming service to its Prime shoppers who pay $79 a year for subsidized shipping at no additional cost. It already leaked an inadvertent preview earlier this month.
  • Now that Apple TV is gaining traction, it wouldn't be a surprise to see Apple (Nasdaq: AAPL) go from piecemeal digital rentals and purchases to adding an "all you can stream" option. It hasn't taken this approach with digital music, but there's no premium cloud-based music service that is making a dent in its iTunes stronghold.
  • Coinstar's (Nasdaq: CSTR) Redbox has been talking up a digital strategy since last year.  

The rub, of course, is that none of them are close to competing with Netflix now. Xfinity is just Comcast's way to keep the cord-cutting in check. Its cable bills are several times over Netflix's monthly rate. Coinstar is a brand associated with cheap DVD rentals. It will have an uphill battle if it wants to take on Netflix in streaming instead of cashing in on the gradual closing of Blockbuster stores.

Amazon and Apple are the two that should be taken seriously, but they're missing a major component.

I'm not talking about the existing base of 20 million subscribers at Netflix, though that's huge given that content licensing deals are inked for fixed sums. A content provider will be missing out on a big chunk of the audience if it plays hardball with Netflix.

The scary truth is that Netflix doesn't need the studios to play along. As long as Netflix clings to its DVD distribution centers, it can still offer any title on the market. No one else can do that. Blockbuster and Redbox have local access to new releases, but Netflix has it all. Apple and Amazon will never be able to compete.

This doesn't mean that Netflix has a birthright to the stratosphere. Investors have to realistically asses what this market is worth. The playing field will be more level internationally, where Netflix is in for cutthroat competition as an exclusive streaming service.

However, predicting that Netflix will falter because of competition that doesn't exist or amortization accusations has been painful for shorts in the past. Why should the future be any different?

Is Netflix overvalued? Share your thoughts in the comment box below.