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Oct 16, 2017

S3 Analytics: NFLX Short Interest Increases Prior to 3rd Quarter Earnings

Short interest in the Internet Retail Sector has grown by $8.7 billion, or 70%, in 2017, increasing from $12.6 billion at the end of 2017 to $21.3 billion today. Prior to the beginning of this quarter’s earnings season, with Netflix Inc. (NFLX) reporting after the today’s close, short interest in the sector has increased by $571 million over the last month and $342 million over the last week.

Short exposure in Netflix Inc. has seen the largest increase over the last week with $184 million of new short interest today and $316 million over the last week – traders are increasing their short positions ahead of today’s 3rd quarter earnings report. Netflix is the sixth most shorted stock in the U.S. market, still behind Amazon.com in fourth place.

Netflix has increased its subscription price in the last quarter, potentially increasing overall revenues if their subscriber base and growth rate do not decrease. Netflix last increased its subscription price in April 2016, which resulted in a lower than expected subscriber growth rate and shareholders selling Netflix shares. Netflix’s stock price fell quickly, resulting in a month-long 21% price slump, before stabilizing and going on a year and a half 129% rally.

Netflix short sellers have taken a greater beating than their Marvel series villains, losing over $2 billion in mark-to-market year-to-date losses and are down 49% on the year. They are hoping for Netflix’s subscription growth rate to decline due to its recent price hike and competition from Amazon.com (AMZN), Sony Corp (SNE) and YouTube Inc. (owned by Google).

Netflix’s option market has also been very active, with this week’s expiry leaning towards call buyers, 51k open call contracts vs. 43k open put contracts. But option traders looking for a winning lottery ticket by buying out of the money calls and puts are leaning towards put buyers, 28k “out of the money” call contracts vs. 31k “out of the money” put contracts.  Only 55% of call owners are out of the money while 74% of put buyers are out of the money.

Netflix equity short sellers and put option buyers are hoping for history to repeat itself and for Netflix’s stock price to decline as it did after its last price hike.

Want deeper insight into the above analysis? Contact:
Managing Director Predictive Analytics, S3 Partners, LLC
The information herein (some of which has been obtained from third party sources without verification) is believed by S3 Partners, LLC ('S3 Partners') to be reliable and accurate. Neither S3 Partners nor any of its affiliates makes any representation as to the accuracy or completeness of the information herein or accepts liability arising from its use. Prior to making any decisions based on the information herein, you should determine, without reliance upon S3 Partners, the economic risks and merits, as well as the legal, tax, accounting and investment consequences, of such decision.

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