Netflix Inc. (NFLX US) will be reporting 1st Quarter earnings this afternoon and short interest is up $685 million, or 23%, to $3.6 billion this year. Short interest has been relatively stable since the end of January, with balances trending between $3.3 billion and $3.7 billion over the last three months.
NFLX short sellers were bloodied in 2015 when the stock rose 139% for the year. 2015 short interest averaged $3.5 billion, topping out at $6.3 billion in November 2015, and decreasing by almost two thirds to $2.3 billion in July 2016. Short sellers were down $2.2 billion in mark to market losses, or 63% in 2015 and another $145 million, or 4%, in 2016. 2017 hasn’t fared any better for short sellers, and with today’s 2.5% stock price increase, short sellers are down another $532 million, or 16%. NFLX short sellers are down a total of $2.9 billion in net of financing mark to market losses since 2015.
While NFLX short conviction was conspicuously strong in 2015 as the increase in short balances outpaced the growth in NFLX’s stock price, we saw short conviction begin to wane at the end of the first quarter of 2016. As NFLX’s stock price began to rally again in the second half of 2016, short sellers did not increase their shorts in lockstep with NFLX’s price moves; instead they found these price moves as reasons to buy to cover.
While the $240 million increase in short interest since February does tell us that short sellers are keeping NFLX in their sights, their balances are tenuous. With NFLX’s stock price already up over 18% in 2017, a continued rally may prompt already jumpy short sellers to close out their short positions quicker than usual. If today’s earning report is positive, short interest may drop down to the $3.1 billion level we saw in June, July and August of 2016. That would mean over $500 million of buy to covers boosting NFLX’s stock price even higher.
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