If you are looking for the best ideas for your portfolio you may want to consider some of Greenlight Capital’s top stock picks. Greenlight Capital, an investment management firm, is bearish on Netflix Inc (NASDAQ:NFLX) stock. In its Q4 2019 investor letter – you can download a copy here – the firm discussed its investment thesis on Netflix Inc (NASDAQ:NFLX) stock. Netflix Inc (NASDAQ:NFLX) is an online video streaming service provider. The stock is up 45.9% since the Greenlight Capital’s pitch in January 2020, which suggests the investment firm was wrong in its decision. On a year-to-date basis, Netflix Inc (NASDAQ:NFLX) stock has rise by 54.7%.
On January 21, 2020, Greenlight Capital had released its Q4 2019 Investor Letter. Greenlight Capital said that Netflix Inc (NASDAQ:NFLX) stock has massive downside potential. This isn’t the first time Greenlight Capital talked about Netflix stock. The investment firm has been a long time Netflix bear. In 2017, we shared Greenlight Capital’s bearish Netflix thesis in this article.
In 2019, the Greenlight Capital Fund recorded a return of 13.8% as compared to 31.5% of the S&P 500 Index.
Let’s take a look at comments made by Greenlight Capital about Netflix Inc (NASDAQ:NFLX) in the letter.
“We have been negative on NFLX’s earnings prospects for a long time, and we used the late2019 bounce in the shares to make it a more substantial investment. For years, NFLX has been an open-ended growth story, where the value of a subscription was considered to be underpriced and bulls could dream about future subscriber totals in the context of the global population. The market celebrated NFLX as the king of a perceived “winner-take-all” (or “winner-take-most”) global market for streaming video-on-demand (VOD).
We believe this narrative is finally coming to an end. NFLX is no longer the only valuepriced streaming VOD provider. There are now a half-dozen subscription services and in the coming year there will be additional credible entrants with deep content libraries. Not every customer will choose to subscribe to all services, and on the margin, substitution will occur. We believe that new competitors have already hurt NFLX in the U.S. Following an unexpected Q2 subscriber loss and in response to management’s apparent optimism, analysts raised estimates for U.S. growth; as recently as September, consensus expected NFLX to add 1.5 million new customers in the fourth quarter. Instead, in October, the company guided to just 600,000. Still, Wall Street cheered the lowered guidance because it was deemed to be “conservative.” In fact, the CEO ended the conference call by saying he looked forward to “blowing away” the guidance.
It appears to us that new subscriptions are slowing and cancellations are accelerating. Competition is denting the NFLX domestic story, just as the platform loses its two most popular shows, Friends (in 2020) and The Office (in 2021), forcing management to spend aggressively to create and market binge-and-forget Netflix Originals5 and stand-up comedy specials, which lack staying power. In response, management has decided to stop disclosing U.S. margins and subscriber totals beginning in 2020.
International subscriptions will continue to grow, but those customers are far less valuable than domestic subscribers, in large part because the revenue per user is lower in international developed markets and much lower in developing markets. Even so, international subscriber growth is now decelerating as well. As NFLX has to compete for subscribers to maintain user growth, the pricing-power narrative should increasingly come undone.
In what appears to be a desperate attempt to achieve international subscriber growth headlines, the company recently launched sub-$4 per month mobile-only plans in Thailand, Malaysia and Vietnam, and in December NFLX began offering up to 50% annual subscription discounts in India. Obviously, the marginal economics on these new subs are… marginal.
To the extent the market sees the NFLX growth story as “busted,” there is a lot of downside to the shares. At present, NFLX burns several billion dollars a year in cash and has accumulated a heavy debt load, even before considering future content commitments. Of course, NFLX could service the debt and de-lever by raising equity – but doing so would be a cold admission that the party is over. We doubt management will rush to do that.”
In Q1 2020, the number of bullish hedge fund positions on Netflix Inc (NASDAQ:NFLX) stock decreased by about 4% from the previous quarter (see the chart here), so a number of other hedge fund managers seem to agree with Netflix’s downside potential. Our calculations showed that Netflix Inc (NASDAQ:NFLX) is ranked #16 among the 30 most popular stocks among hedge funds.
The top 10 stocks among hedge funds returned 185% since the end of 2014 and outperformed the S&P 500 Index ETFs by more than 109 percentage points. We know it sounds unbelievable. You have been dismissing our articles about top hedge fund stocks mostly because you were fed biased information by other media outlets about hedge funds’ poor performance. You could have doubled the size of your nest egg by investing in the top hedge fund stocks instead of dumb S&P 500 ETFs. Below you can watch our video about the top 5 hedge fund stocks right now. All of these stocks had positive returns in 2020.
Video: Top 5 Stocks Among Hedge Funds
At Insider Monkey we scour multiple sources to uncover the next great investment idea. There is a lot of volatility in the markets and this presents amazing investment opportunities from time to time. For example, this trader claims to deliver juiced up returns with one trade a week, so we are checking out his highest conviction idea. A second trader claims to score lucrative profits by utilizing a “weekend trading strategy”, so we look into his strategy’s picks. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We recently recommended several stocks partly inspired by legendary Bill Miller’s investor letter. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 in February after realizing the coronavirus pandemic’s significance before most investors. You can subscribe to our free enewsletter below to receive our stories in your inbox:
Disclosure: None. This article is originally published at Insider Monkey.