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Thursday, April 22, 2010

Netflix Again "Goes Crazy" as Shorts are Tormented; More Share Repurchases?

We wrote about shares of Netflix (NFLX, $100) going crazy last January and questioned why persons/firms would short the stock given favorable fundamentals. Well, another short squeeze is tormenting those who were (are) betting on an earnings miss:

Surprisingly, short interest (from Nasdaq.com) remains high at just under 1/3 of float, albeit somewhat lower than last fall:

Our prior questioning of share repurchases in the mid-$40s again appears off the mark, although who knew momentum would carry shares to current levels (51 times trailing earnings, 32 times 2011E earnings) even if results remained solid (as they have)?

Management provided the following "Buyback Update" in Netflix's quarterly commentary:
  • We were aggressive buyers of Netflix shares in the first quarter, as we have been in past quarters. In total, we spent $108 million repurchasing 1.67 million shares at an average cost of $64.51 per share in the first quarter.
  • Cumulatively, we have returned $732 million to shareholders by repurchasing 21.1 millionNetflix Q1 FY 2010 Earnings April 21, 2010 fully diluted shares outstanding at quarter end.
    Netflix shares at an average cost of $34.67 per share. This represents 38% of the 56.2 million
  • We expect to be active again this quarter repurchasing Netflix shares.
With shares now at $100, we wonder if that third bullet still holds?

If we were long the stock, we'd prefer management NOT to repurchase at current levels, particularly given historic NFLX volatility (even acknowledging a powerful subscriber business model). In the past, too many other companies, including Weight Watchers (WTW), confidently and aggressively repurchased shares with "cheap", borrowed funds only to later see significant share price declines. After all, note that "the Market" is often surprised despite so much "smart" institutional money moving the markets. The best way to protect against such surprises is by purchasing (or repurchasing) shares at low multiples of earnings and cash flow.

Happy investing,

Jeffrey Walkenhorst

Disclosure: long WTW.

© 2010 Jeffrey Walkenhorst
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