Wednesday, October 26, 2011

NFLX: Tilson Antes Up (again)

Whitney Tilson was very public about his short position in Netflix (NFLX). Come to think of it, is there anything that Tilson isn’t public about? Don’t get me wrong, I’ve always enjoyed his presentations, particularly when they agree with my investment stance.  We all like validation.

In truth, I agreed with Tilson’s negative view of Netflix' valuation.  Being short a few NFLX shares at the time added to the enthusiasm.  When Tilson went public it was big news.  How many Netflix skeptics were there?  It took guts.  Proving the point, several “friends” sent me emails with Tilson’s presentation attached.  That was the one entitled - Why We're Short Netflix.   My favorite line:  "In short, the stock is priced for perfection and any misstep would likely trigger a huge selloff. "

Anyway, all the emails I got said roughly the same thing. “Hey look, here’s another idiot like you who thinks Netflix is overvalued. Don’t you morons get it? This time it’s different!”  Ok.  They didn't really say that, but it felt that way.

Now I’ve long been annoyed with Tilson (not that you care) for trying to make the term “value investing” his own private brand. Probably it is just jealousy that I didn’t think of the Value Investing Congress, the Value Investing Newsletter, etc. myself.  But despite my view of Tilson as a great marketer, if not a great investor, I found myself on the same side of a trade with him for once.  And, honestly, it felt good to be hand-in-hand in solidarity with Mr. Value Investing himself.

Besides misery loves company.  (Here we will pause for anyone who has not looked at a chart of Netflix heading to $300 a share or around $15 billion in market value.)  And shorting NFLX was painful even for a chicken like me.

See my short positions are normally not very big. I don’t short for clients, but instead limit my shorts to my (poor) children’s college fund. If things go wrong, I can take comfort in knowing that my children are too young to know what their father is doing to (I mean “for”) them.  They think Daddy's job is boring and I don't want them to know how truly exciting (or terrifying) I sometimes can cause it to be!

So my Netflix short started small.  It even came and went sometimes with a modest gain or loss depending on my mood.  I felt very alone, lonely even. But as Netflix shares rose, I got more convinced and more serious about the thesis and my position grew.  It soon got big enough that the kids might actually miss out on a semester or two if I was wrong.  And for once, Whitney Tilson was my friend and partner, instead of the guy who stole value investing.

And then?  Well, right about that time, Tilson deserted me!  And not content to do so quietly, Tilson went public with “Why We Covered our Netflix Short” (as if anyone didn’t know).   It should have said simply "we've lost money and don't want to lose more", but instead the presentation argued that the facts about Netflix had changed.  My favorite lines: "We conducted a survey" and "Many things will have to go very right for the company to justify its current market valuation, but we no longer think it’s wise to bet against Netflix."

In actuality the valuation on Netflix was only getting more pronounced and the competition was just getting warmed up.  Tilson's Netflix reversal was about pain, more than it was about a letter from NFLX's CEO or any user surveys.  The pain of watching a position go the wrong way has a way of making all counter-arguments seem more valid.  The grass is greener on the other side and clients are pissed because you don't "get it"!  So Tilson caved in.  No more shorting Netflix, I promise!

Once again, I got emails. “See even Tilson has come around. You’re an idiot. Aren’t you tired of losing money too!?!?” And that obligatory attachment.

In truth, I was tired of losing money.  And I can’t prove I’m not an idiot.  But shorting Netflix got easier for me as the price rose.  Tilson's original short thesis on Netflix was well and truly intact to my mind.  So my position grew again.  Was it because I was mad at Tilson? Never.

Or because our family cancelled our Netflix account the day before the price increase? Yes.

Or because I got the feeling lots of other people were doing the same? You know it!

It also didn’t hurt that the company was trading at ever higher (and more ridiculous) valuations.

Even then it was not a worry free investment. Seemingly every day there was a rumor that Netflix was going to be bought out.  Google, Apple, the usual suspects.  Certainly anything was possible.  It pays to never underestimate a CEO who is desperate to “do a deal”.

Well, the phantom deal didn’t happen and Netflix is not riding high any more. It's been a swift drop from $300 to a more pedestrian value of $77 a share.  The relief for me (and my oblivious children) and the small measure of redemption that comes with it is nice. The kids got their semesters back (and then some).  But grad school willl have to wait.  I also closed my short in the low $100's, missing today's rout.

With Netflix's troubles in the news every day, I’ve thought about Tilson recently.  He should be doing his victory lap.  No doubt it would have a multimedia event that would dwarf my feeble effort!

It doesn’t make me feel good that Tilson missed this boat. We value guys need to stick together.  But instead, Tilson is on the sidelines in a game he started.  Every time I think about it the movie Rounders comes to mind.  Yes, I know it is random.

In the movie, Matt Damon plays a poker player. Viewers follow his adventures in life and poker, often as they relate to Teddy KGB played by John Malkovich, who is an underworld character apparently of Russian descent (hence the name). In one sequence, Damon’s character plays KGB and earns enough to pay off all his debts (owed to KGB and payable in blood or treasure).  Unfortunately, Damon's character plays on and predictably loses all his winnings.  Not one to resist kicking a man when he's down, KGB gloats in a thick Russian accent, saying: “You must be kicking yourself for not walking out when you could… bad judgment… don’t you worry son, it will all be over soon.”

It doesn’t hurt that Tilson looks a bit like Damon.  I wonder who will play Mr. Market in the Netflix movie?

In the final minutes of that Rounders movie Damon’s character finally takes down KGB, to which the Russian says in defeat… “He beat me… straight up… Pay him… pay dat man his money.”

Like any sap, I love a happy ending. After months of suffering and ridicule, I collected my Netflix winnings and moved on.  I was hoping Tilson could move on too.  One would expect him to avoid any mention of Netflix.  Fool me once... fool me twice?

But apparently steering clear of Netflix is NOT in the cards for Tilson (pun intended).  According to a headline today,  Whitney Tilson Is Buying Netflix.  The publicity machine rolls on. 

Of his latest foray, Tilson writes:

“it’s been frustrating to see our original investment thesis validated, yet not profit from it. It certainly highlights the importance of getting the timing right and maintaining your conviction even when the market moves against you. The core of our short thesis was always Netflix’s high valuation. In light of the stock’s collapse, we now think it’s cheap and today established a small long position. We hope it gets cheaper so we can add to it.”
I admire Tilson's latest conviction on Netflix and I can't wait to read the presentation, which will no doubt be titled "Why We're Buying Netflix".  In any case, I won't be following Tilson on this one.  You might say I know when to walk away.

The real lesson here has nothing to do with Netflix, but about conviction.  If you’ve done your homework, stick to your guns even if/when the going gets tough. Anyone can panic and it usually happens at precisely the wrong time.  In order to make real money in the market, more often than not you have to go against the crowd.  My Netflix short looked wrong for a long time before I was proved right.  If I'd relied on my emotions, I'd be looking at a fat loss.

Speaking of which, I've been short Amazon (AMZN) shares for quite some time.  And I've been adding to the position steadily.  If the after-hours move is any indication, it looks like the kids are going to get a few more classes paid for tomorrow.  Grad school anyone?

Disclosure:  Short Amazon


  1. if you love amzn (shorting that is)

    you'll love LNKD

  2. No doubt on LNKD, but market can be on a high for a while. Wait for Groupon.

    Tilson's presentation on NFLX is one of the best short thesis I have seen. It was concise and well-argued, and based on the reasoning, as close to a sure thing as any. But alas, he got too close to the CEO, even calling him a "friend". Nothing wrong with that except when you are betting for him to fail. Tilson was hoodwinked on this one, can't wait to see his long thesis though.

  3. I think you're making a bad move shorting AMZN. Only reason AMZN went down was because they're investing in their future over short term profits (as a value investor you should appreciate that).

    I also think their future is very bright. They have a lock on e-commerce and with their new line of Kindle's they will begin to have a large presence in online content delivery.

  4. How about the valuation for AMZN Jordan? And there are other aspects that the author points out

  5. It seems Tilson is trying to make back his money the way he lost it...

    I too get annoyed with his large public presence. He's underperformed the S&P since inception & loves to coattail others. Some might call him a "fund of funds" or a "fund of other people's ideas"

    needless to say you're not the only one perhaps a little annoyed by tilson. He does have good PROPRIETARY presentations every once in awhile though.

  6. how about that GERN?
    it was just about a year ago when you stirred up some trouble :-)

  7. Thanks for the great article.
    Nice to see the good guys win ...

  8. thanks for the nice article

    Would you be able to share your long ideas / convictions ?


  9. It has been long since I read anything from you. Always admired your thought process and enjoyed reading your post. Have not seen much from you on Gurufocus either. Are you writing on some other site?