S3 Analytics: NFLX Shorts Quiet Ahead of Earnings

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.

Netflix short sellers have been trimming their positions all year long as its stock price more than doubled in the first half of 2018. There were 21.9 million shares of NFLX shorted to start the year, worth $4.2 billion of short exposure. Today, there are 17.3 million shares of NFLX shorted, down 24% for the year. But even though shorts have been covering steadily throughout the year, cash at risk has actually increased as NFLX’s stock price increase has outpaced buy to covers. Short Interest is $6.8 billion, down from a recent historical high of $7.98 billion on June 19^th but up $2.6 billion, or +62%, for the year.

Interestingly, there has been no significant movement in shares shorted ahead of today’s earnings announcement. In the month of July, NFLX shares shorted are up 199k, or 1%, and short interest is up $153 million, or 2%. Short sellers are sitting on their positions and not increasing or decreasing their bets ahead of today’s announcement, possibly shell shocked from the $4.1 billion in year-to-date mark-to-market losses they’ve incurred in 2018.

Both Amazon.com and Netflix short sellers have taken direct shots on the chin this year, but remain the 2^nd and 4^th largest shortest in the U.S. and the top two shorts in the Internet Retail Sector. Internet Retail is the most shorted sector worldwide and the second most shorted sector in the U.S. behind Biotechnology.

If Netflix’s earning announcement is positive, we can expect short covering to continue and possibly accelerate if the stock’s rally continues at its recent pace. The additional buy to covers by the short side will only add to the buying pressure on the stock which already has average 12 month price targets of $480 from Morgan Stanley and $490 from Goldman Sachs.

Want deeper insight into the above analysis?

Contact:  Ihor.Dusaniwsky@S3Partners.net

Managing Director Predictive Analytics, S3 Partners, LLC

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