Netflix bears take it in the shorts

Earnings That squealing sound you hear is the sound of Netflix bears caught in a short squeeze by the company’s stellar Q4 results, posted after market close Wednesday. With earnings up 52 percent over last fourth quarter and total subscribers cresting 20 million for the first time, shares of Netflix rose by more than $17 in the after-hours market, or nearly 9.5 percent from the day’s official close.

Shares of Netflix had sagged in recent weeks as a number of prominent analysts  turned bearish on the stock, arguing that Netflix’s sky-high P/E ratio could not be sustained much longer.  One prominent hedge-fund manager, Whitney Tilson, went very public with his case for shorting Netflix shares, arguing that rising programming costs, increased competition from Apple, Google and others, and mounting pressure on margins were setting Netflix shares up for a fall, perhaps a steep one, after they grew more than 200 percent in the past year. Tilson’s analysis drew an unusual public riposte from Netflix CEO Reed Hastings, who spelled out his case for Netflix’s long-term upside, urging his “friend” and fellow-philanthropist Tilson to reconsider his position.

Anyone who took Tilson’s advice and shorted the stock is probably feeling a bit singed tonight. With the Q4 and full-year results exceeding even Netflix bulls’ expectations, the stock obviously isn’t going down anytime soon — at least not enough to make a short-side bet pay off. Instead, what you saw in the after-hour surge was likely fueled by shorts scrambling to cover their bets by buying Netflix shares before the damage can get any worse — the classic short squeeze scenario.


More on the substance of Netflix’s earnings report coming up.