February 11th, 2011 10:50 pm EST
Whitney Tilson Covers His Netflix Short
In late 2010, T2 Partners Management, LP co-founder Whitney Tilson and Netflix CEO Reed Hastings got into a bit of a friendly public skirmish.
Tilson released a 22 page document titled "Why We're Short Netflix". In the document, Tilson, in a nice way, made the case for why Netflix was a great short idea. The increasing cost of acquiring content and the increased competition in the streaming movie market were two of the main reasons why T2 Partners was short NFLX.
Netflix CEO Reed Hastings obviously disagreed with most of Tilson's findings. Hastings took to SeekingAlpha.com to rebut Tilson, and did so in a very polite and self-effacing way. See, Tilson and Hastings are friends, so the two didn't take off the gloves. Instead of a fist fight, a civil argument between two chums broke out.
At the time that Tilson's manifesto was released to the public, NFLX was trading at $178.05/share. It would be safe to assume that T2 was short at a much lower price.
Less than two months later, Tilson decided to throw in the towel and cover the entirety of T2's short position in NFLX. NFLX recently released their quarterly earnings, and the numbers were a great deal stronger than many had anticipated, including Whitney Tilson.
NFLX currently trades at $231.07, giving it a total valuation of $12.2 billion.
According to BusinessInsider.com, T2 Partners Management, LP gave up on their NFLX short for three major reasons:
1. Recent quarter was stronger than expected, and, most importantly, Netflix's margins were stronger than expected
2. Higher than expected satisfaction rate with Netflix's streaming service (T2 conducted a poll themselves)
3. Feedback from the public investing community caused T2 to re-evaluate their position
Hats off to Tilson and company for being able to throw in the towel so quickly on NFLX.
People naturally become more attached to positions once they express their opinions in public. The fact that Tilson was able to throw in the towel and move on says quite a bit about what kind of a balanced and methodical mind he possesses. Most people in his position would have likely stubbornly held on to the NFLX short because they didn't want to be proved wrong. T2 Partners Management, LP, on the other hand, quickly jettisoned their position once they realized that the story had changed.
There are some people that can still make a very convincing argument why Netflix is a solid long-term short.
The problem - who's to say that NFLX won't double before it starts to fall apart (if it falls apart at all)? NFLX is a runaway locomotive right now, and stepping in front of it at this point seems foolish.
Note: I have no position in NFLX.