Netfracked

Original Post from 4/19/20 1:03 PM: I have a bearish position on Netflix based on my long-term outlook. It is not for the faint of heart. Netflix broke to the upside last week before potentially failing on Friday. Earnings are Tuesday after the bell. I have no idea which way Netflix will move, but if it say, gaps up to $500 after earnings, I will add to my position.

Here's my bearish case: I think either the past quarter (this earnings report) or the current quarter will be "peak" earnings for Netflix for the next year, if not longer. When dealing with a bubble stock, the end comes when investors can no longer extrapolate growth into the future. Investors drive stocks into bubble territory on the hope of compounding growth into the future. During the growth phase, this number can move around and produce big pullbacks in the stock, but as long as the prospect of high growth is out there, the bears are fighting against a classic "castle-in-the-air" story. When growth peaks, valuation takes over. The door closes on the cockeyed-optimism scenarios. Even a neutral valuation could cut a stock in half. Outright pessimism drives them down 90 percent or more as was seen after the dotcom bubble.

As subscriber growth slows, content spending is ramping up. This will eat into earnings growth and cause a revaluation of the shares. Along with an overall bear market in stocks, this could eventually trade down to the $60 area where there are gaps on the chart.

Update: Netflix reported results.

The numbers are better than expected. Subscriber growth was stronger than expected, more than double forecasts, but much of it was in Latin America and Asia. Netflix also said it suffered from the strong dollar.

The market initially spiked more than 10 percent on the positive aspects, then gave it back. It is a very good quarterly report, but the context is growth and performance during a perfect economic environment for the service. It think it doesn't look great with that context, but the market may disagree. Will find out in tomorrow's regular trading session.