Get Rid of the Shorts – Beware of What You Wish For. Also, Bait-and-Switch at Netflix?

There are more than a few morals to the Netflix (NFLX) story, but there's one nobody is talking about... I put this in the "beware of what you wish for" bucket, because it's something so many people wish for that they don't realize why what they're wishing for may very well backfire... badly. I'm talking […] Not rendering correctly? View this e-mail as a web page [here](. [Empire Financial Daily] Get Rid of the Shorts – Beware of What You Wish For. Also, Bait-and-Switch at Netflix? By Herb Greenberg --------------------------------------------------------------- [Stocks fall – and Steve Jobs' prediction coming true]( Steve Jobs' ability to predict the future was remarkable – Now his "Final Prophecy" is coming to life, with huge implications for you and your money. And that's exactly why investing legend Joel Litman has just prepared the most fascinating and useful analysis I've seen in many years... [Click here to view](. --------------------------------------------------------------- There are more than a few morals to the Netflix (NFLX) story, but there's one nobody is talking about... I put this in the "beware of what you wish for" bucket, because it's something so many people wish for that they don't realize why what they're wishing for may very well backfire... badly. I'm talking about the wish by many that short sellers would just go away. Nobody likes anybody raising red flags over a company whose stock they own. The best investors use it as a reason to re-analyze their positions – either by giving them greater conviction in what they own or by causing them to sell or (if they're considering buying) avoid. The worst investors... complain. Sometimes the shorts are right, sometimes they're wrong. Either way, they actually help the investors who complain the loudest. Look no further than Netflix, which is the perfect example... For years, shorts were sounding the alarms over a variety of things, including the way the company accounted for costs related to creating content. (Full disclosure: When I was in the media, I chronicled these concerns and others, including at times various aspects of Netflix's business model.) But none of that mattered, because the only thing investors cared about was subscriber growth... which ultimately transcended any if not all concerns. Meanwhile, the market's melt-up made short selling increasingly difficult. By the time the pandemic rolled around, nobody was shorting stocks. (OK, that's an exaggeration... but you get the point.) That in turn created a dynamic that gets us to where we are today... Suddenly, stocks that had been leapfrogging each other on the way up with outsized daily gains were in a race to see which one could implode the fastest. While I don't have the hard data to prove it for each disaster du jour, based on what I've seen, one thing many had in common was an absence of shorts – or let's say a small percent relative to their float. --------------------------------------------------------------- Recommended Link: [It's the end of an era]( Whitney Tilson just made a huge announcement regarding the future of Empire Financial Research. As he says in this short video message, "It's the end of an era for Empire." [Click here to see the full message](. --------------------------------------------------------------- When that happens, especially with these emotionally charged stocks, the stocks plunge like they walked into an elevator shaft... Let's not forget what a short is: It's selling borrowed shares in hopes of buying them back and returning them to their owners at a lower price. This means that if a stock trades down on bad or disappointing news, there's a natural cushion of buyers to soften the blow. Without them, Exhibit A is Netflix... which tumbled 35% in a single day last week on disappointing subscriber numbers. As the chart below shows, short interest over the past three years had skidded by two-thirds to a meager 2% of the company's float. By contrast, take a look at online used-car retailer Carvana (CVNA). When the company reported disappointing news after the market closed the day of the Netflix fiasco, CVNA shares were immediately down by 25%, but then bounced back to slightly positive. The next day, when the market opened, the stock started out sliding like air seeping out of a hot air balloon, before finishing the day down 12%. Unlike Netflix, roughly 20% of Carvana's float was sold short, helping cushion the blow. That doesn't mean Carvana won't move much lower... but as convoluted and odd as it sounds, at the risk of oversimplifying this: without that short position, it arguably might have gotten there faster. The proof, it would seem, is in Netflix. Speaking of Netflix, you've likely heard that the company plans to put an end to the sharing of accounts among families... Well, it didn't put it quite that way. What it said was that it is moving to end sharing outside of immediate households, which Netflix defines as under the same roof. As Chief Product Officer Greg Peters explained on the company's earnings call... So if you've got a sister, let's say, that's living in a different city, you want to share Netflix with her, that's great. We're not trying to shut down that sharing, but we're going to ask you to pay a bit more to be able to share with her and so that she gets the benefit and the value of the service, but we also get the revenue associated with that viewing. As I wrote on Twitter (TWTR), if Netflix goes that route, I believe it'll be a goodwill/reputational/PR disaster. Those "shared" accounts, after all, are how families work across the streaming spectrum – and I'm willing to bet that's how "under one roof" is viewed as "family" by millions of Americans. In other words, grandma – who is on a fixed income and has been part of her kids' account – will now be viewed as an illegal moocher... The flipside, of course, is that the change will lead to an automatic bump in revenue, assuming even a small percentage of those folks who share accounts pay up. That will be welcome news to any investor hoping for a turnaround in Netflix's fortunes and stock price. But there's a trade-off for everything, and I bet most Americans – already reeling from the effects of inflation – will see it as bait-and-switch. Plus, competitors may very well seize the moment. The Wall Street Journal ran [a good story]( comparing the sharing terms of other streaming services. Among them: - HBO Max states that "authorized users are limited to members of your immediate family or household." - For Apple TV+, Apple (APPL) only asks that family members share "the same home country." It doesn't care if they're related or have the same address. And there's something else... This change is coming when the entire streaming industry – Netflix included – is feeling the pain of too much competition. Just yesterday, news broke that CNN's new parent, Warner Bros. Discovery (WBD), will shut down the three-week-old CNN+ service. Rich Greenfield of LightShed Partners [tweeted](... As I responded... There's just too much content, too many streaming services, too little time, too much garbage. That's my story, and I'm sticking to it. Have a great weekend, everybody. As always, feel free to reach out via e-mail by [clicking here](mailto:feedback@empirefinancialresearch.com?subject=Feedback%20for%20Herb). And if you're on Twitter, feel free to follow me there at [@herbgreenberg](. My DMs are open. I look forward to hearing from you. Regards, Herb Greenberg April 22, 2022 P.S. Empire Financial Research CEO Whitney Tilson just made a huge announcement about the future of Empire's business. As he says, "It's the end of an era." Put simply, it's a brand-new way to do business with us – one that will simplify, streamline, and save you money. Whitney shares all the details [right here](. If someone forwarded you this e-mail and you would like to be added to my e-mail list to receive e-mails like this every weekday, simply [sign up here](. © 2022 Empire Financial Research. All rights reserved. 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