Netflix

Netflix Inc (NFLX) short sellers cut their short exposure in 2018 by 37%, covering 8.1 million shares of shorts as they lost $2.04 billion, -34.90%, in mark-to-market P\L. In the first month of 2019 we are seeing a reversal of the trend, with short sellers adding 1.35 million shares of new shorts, +9.7%, in less than three weeks. While NFLX short interest has climbed 45%, to $5.36 billion, short seller’s losses continued to mount this year, down another $1.2 billion in mark-to-market losses in less than a month.

The FAANG stocks are five of the top ten most shorted stocks in the domestic U.S. stock market and because of the sheer size of combined short exposure they represent both risk “Alpha” trades and hedging “Beta” trades.

The weeklong rally from last week’s lows has taken a bite out of the $93.7 billion of mark-to-market profits, +11.12%, short sellers have earned since the beginning of October. Over the last week the S&P 500 index increased by 3.31%, the Nasdaq by 4.3% and the Russell 3000 by 3.23%. The S3 Blacklight platform tracks over 8,000 U.S. domestic equity shorts worth over $825 billion, which incurred mark-to-market losses of $23.3 billion, or -2.86%, over the last week.

FAANG stocks (FB, AMZN, AAPL, NFLX & GOOGL) were down 4.7% last week, 3.6% on Friday alone, after Amazon.com and Alphabet announced disappointing quarterly results amid overall weakness in the tech sector. While long shareholders incurred large losses from these widely held stocks, short sellers made $1.62 billion in mark-to-market profits last week.

Tesla Inc (TSLA) and the FAANG stocks continue to be some of the largest shorts in the U.S. market, taking five of the top ten spots in the U.S. league table. While Tesla is a momentum, value and convertible arbitrage short, one of the main drivers for the large short interest in the FAANG stocks is their ability to be a “turbocharged” hedge for the long side of a portfolio.

Matthew Harrigan of Buckingham Research downgraded Netflix Inc. (NFLX) to underperform from neutral with a $333 price target this morning. Harrigan pointed to “optimistic forecasts” in long term subscriber growth and competition from both domestic and international streaming services in quality content that may affect future margins.

State and local tax authorities will now be able to charge and collect taxes for online transactions executed by their constituents after the Supreme Court of the United States (SCOTUS) reversed a 1992 ruling which excluded online transactions if the seller did not have a physical presence in the state. This ruling now puts online retailers and brick & mortar retailers on a level taxable playing field.  The news pushed most Internet Retailers into the red, with short sellers up $184 million in mark-to-market profits on their short holdings.

Netflix Inc. (NFLX) shares are down 3.1% in afternoon trading today as Andrew Left of Citron Research issued a short-sale recommendation on the company with a $300/share target price. In addition to Left’s recommendation, Eddy Cue, Apple Inc.’s (AAPL) services head, stated that Apple would not be interested in an acquisition of either Netflix or Walt Disney Co. (DIS), but would rather create its own video content. Finally, the Financial Times published an article today questioning Netflix’s $331.44 historical high it hit last Friday which translates to “a dozen times the $12 billion of revenues reported last year, 120 times the profits it expected.”