I’m planning on digging into NFLX, but before I do here are some old notes for some background and investment approach.

I commented on selling NFLX back in May 2008 . In early April 2008 on TMF SA-NFLX board I said the following. [I have updated the short interest data and lightly edited.]

When looking at short ratio you should take a look at the last years data. Then compare the data to the price and think hard about why people may be shorting. In investing you must understand the bear arguments to help you appreciate the risks.

10/31/2007	15,254,014	1,831,298	8.329619
10/15/2007	14,723,519	1,002,481	14.687080
9/28/2007	14,890,097	1,553,796	9.583045
9/14/2007	14,885,564	808,511	        18.411084
8/15/2007	19,662,835	2,278,661	8.629118
7/13/2007	14,732,494	1,225,250	12.024072
6/15/2007	14,589,684	2,105,360	6.929781
5/15/2007	12,688,131	1,640,332	7.735099
4/13/2007	12,311,641	1,132,482	10.871379

Nasdaq Short Interest for NFLX

Contrary to others opinions I would imagine that at current prices [April 08] we are unlikely to see a drop in short ratio. If anything it will likely increase. [Shorts did increase slightly on 15 April, before falling after shorts took profits after sell-off]

NFLX is a volatile stock and will probably continue to be so. [Ain't that the truth]

Thoughts from My NFLX Sales

Excerpt from the linked May post.

Netflix hit my final sell point of $40 last Thursday [April 17] http://stockcharts.com/charts/gallery.html?nflx so I stayed up Friday night to sell. I was also selling part positions in a couple other companies, II-VI and NUAN, so when I turned to NFLX to enter my limit order I was happy to see it trading at $40.85 bid and so entered my sell limit at $40.85. The bid then started falling away quickly, very quickly. I decided, like me, there would be a lot of people who had $40 as their price target and that the selling would quickly abate and my order still had a good chance of being filled later that day. I went to bed content with the dual thought that I always use limits orders and due to intra-day volatility they are hit 90% of the time, plus I always liked the saying the amateurs open the market and professionals close it.
I awoke the next morning to see NFLX down at $38.56, my order had not filled. Both of my other orders had been filled and they were entered at prices higher than the stock was trading at.

NFLX earnings are out today, 21st April. I expect good earnings as Netflix has beaten all competition into a pulp. While NFLX isn’t quite priced for perfection it is certainly priced with good things in mind, so excellent earnings and guidance will be required to push NFLX higher.
Long term I like the Netflix strategy, but it has been a volatile company and I am confident it will continue to be volatile as competitors will continue to assault the NFLX castle. Hence I sell NFLX when it approaches my valuation targets, this has worked well before and I’d wager it will again. I sold half of my large position at around $33, my cost basis is around $20 from June last year. It is not in a tax deferred account, so capital gains will bite a little.” [I subsequently had plenty of capital losses to offset those gains against ]

By the time I had finished typing that and ran some quick numbers I decided to sell NFLX and placed an order for $39.95. Like most investors I am plagued by fear and greed. I use numbers to stop the pathetic debilitating irrational arguments. The probabilities supplemented with an understanding of investor behaviour drummed in me to David Dreman led me to sell.

This is already getting to long and I’m gagging for a cuppa so here is how my decisions this earnings season turned out.
NFLX – Sold. Excellent, I feel good about selling, but as I like the long term potential of NFLX I am now faced with a decision on when to get back in. I consider the current price good [around $30 in May], but not a slam dunk.

Dean

Still older notes

March 08

I use analysts’ five year estimates and then as they are often optimistic I build in a margin of safety using 75% and 50% of those estimates, with the lower estimates more heavily weighted.
5 year estimates are almost 21%.
That gives me an IV of $34 using a discount rate of 10% and BV of $6.6.

What do you think? Can you see anyway of calling NFLX a strong buy at the moment?

Past earnings 
Year  eps  YoY  2YoY
2007  .97   36%  23%
2006  .71   10%
2005  .64

That gives me a comfort that 20% may be achievable.

I like NFLX, but have little doubt that despite their growing subscribers and software moat that it will be a business continuously under attack.

and

would it be stupid to buy now after it’s just gone up 40% in the last month or so?
YES it would be stupid to buy now, but not because what it has done in the past month or so. It would be stupid buy now as NFLX is no longer undervalued.

My take on Q4 2007 results

the Netflix Vision which is a good story and as of now in late November 2008 looks to be at a good price. Certainly worth digging deeper. I said the following in an email today

“I think NFLX is cheap at these prices and am considering adding to rather than selling. Long term they will be volatile and higher prices are very likely. However, I don’t think they are the best deal out there and if they were my largest holding I would sell some on the current rising market and hold that cash for a likely retracement of the market. Naturally, that could be the worst move I’m looking to make NFLX a larger holding due to my familiarity with the story rather than thinking it has the most potential. To me it is a good risk return with plenty of upside.”

I do still have a small position in NFLX and may add to it.