Netflix (NFLX -3.92%) stock has been on fire lately. Shares of the leading streamer surged as much as 41.5% to $333.98 from a bottom on Feb. 9, giving the stock a gain of 74% for the year. However, that recent run has come mostly on the market's enthusiasm as there has been little fundamental news that justifies the stock's big jump.
Reports that the Obamas were in negotiations to release a Netflix show drove the stock higher last week. The company also got some analyst upgrades during its march higher which tracked with a recovery in the broader market. On Monday, however, some of that air got let out.
Noted short seller Andrew Left of Citron Research said he was short the stock, and recommended shorting it back to $300. In a tweet, Left said:
Stranger Things happening at $NFLX. Wit mkt cap up $17 BIL in a week and short interest. at 10 year low. Citron thinks the stock can be shorted back to $300. Content spend unsustainable long term. Great article today's FT https://t.co/jTM8lGoWdp Congrats to bulls, historic run
— Citron Research (@CitronResearch) March 12, 2018
Left told CNBC, "There are competitors with deep pockets who are going to hire the same producers and create compelling content. Because of that, they do not have a moat like an Amazon. They do not have a moat like a Google," and questioned the recent rise.
Image source: Getty Images.
The danger of short selling
Leaving aside the question of Netfilx's moat or whether the stock deserves its valuation, the idea of shorting Netflix stock is just absolutely terrible on its face.
Short selling is a risky form of investing that involves betting on a stock to fall. However, in doing so, investors expose themselves to potentially infinite downside risk. Unlike going long a stock where at most you can only lose your original investment, short sellers owe money if the stock rises, leaving them especially vulnerable to a growth stock like Netflix. Value investors have almost constantly claimed that Netflix is overvalued as the stock trades at a triple-digit P/E ratio, but that hasn't stopped it from being one of the best performers during the nine-year bull market, gaining 5,700% during that time.
To bet against the stock now, just to make a 10% gain if it falls to $300 is an unnecessary risk for investors. For comparison, Left's last well-publicized short was Shopify (SHOP -2.37%), which fell in October when he announced his short, but has since gained nearly 50%, meaning Left is that much in the hole.
The valuation question
Foolish investors, as in those who subscribe to The Motley Fool's philosophy, know better than to worry about market tops and bottoms -- and the same is true for individual stocks. Netflix will continue to be volatile because it's a popular growth stock and its high valuation makes it vulnerable to pullbacks on bad news. However, even with those peaks and valleys, the stock has been one of the biggest winners on the market, rendering that volatility meaningless to long-term investors
Netflix's valuation may prompt a sell-off, but over the long run investors should be fine. The company continues to get stronger as CEO Reed Hastings expects revenue to increase 28% to at least $15 billion this year; it's also spending $8 billion on content this year to produce 700 hours of original entertainment, and its potential deal with the Obamas underscores the power of its platform. Profitability is also ramping up. Netflix has more than 117 million subscribers around the globe, and the nature of streaming gives creators the flexibility that linear TV doesn't allow regarding timing, content, and creative freedom. According to The New York Times, the Obamas would like to use the platform to share inspirational stories, and there's no better way for them to do so than with Netflix. Recently, Netflix has also poached top creative talent like Shonda Rhimes and Ryan Murphy.
Focusing on the valuation question with Netflix then is missing the point as the company is pioneering a transformation in home entertainment that could last decades. Netflix still appears to have considerable growth ahead of it, especially if it can land a show with someone like President Obama.
Left may be right about Netflix pulling back to $300, but over the long term, the stock is almost definitely going higher. Shorting it is one good way to lose a lot of money.
