Concise sellers bet heavily against Netflix Inc. (NFLX) in the run-up to the streaming giant’s fourth-quarter results.
In a research note, S3 Allies revealed that short interest in Netflix climbed 45% to $5.36 billion, reflecting a flurry of bearish invitations on the stock since the start of 2019. S3 pointed out investors added 1.35 million shares of new shorts in less than three weeks, putting a 9.7% rise, and that negative sentiment around the stock increased rapidly in the days leading up to Netflix’s earnings check up on.
“This week, ahead of earnings, we’ve seen an increase of short selling with 360,000 shares of additional excluding sales as of this afternoon, +2.4%, and overall short exposure increasing by $541 million, +11.2%,” Ihor Dusaniwsky, conducting director of the financial technology and analytics firm said in the note, published Jan. 17.
Increasing short selling activity coincided with a swanky rise in Netflix’s share price. The stock soared roughly 50% from its low hit in December as investors put old worries to stay and applauded the company’s decision to hike prices between 13% and 18%.
For short sellers, this meant stomaching another $1.2 billion in mark-to-market failures in less than a month, according to S3.
“NFLX short selling had been declining in the latter half of 4th quarter 2019 but started to pick up after the new year, even though NFLX’s stock price began to rally,” wrote Dusaniwsky. “Dumpy sellers were actively selling into NFLX’s price strength, looking for a reversal back to the price defect we saw in December.”
Were the Bears Right to Bet on Netflix’s Results Disappointing?
Netflix bears at least got their wish that the flock’s fourth-quarter results would underwhelm. The streaming giant added more subscribers than predicted and beat earnings guesses, too. However, in the end, that wasn’t enough to satisfy lofty expectations — investors greeted the announcement by sending the shares down 2.83% in after-hours interchange.
Dusaniwsky initially predicted that short sellers would start covering their positions if the stock go oned to rally after the results, adding that Netflix’s share price could be set to return to September 2018 highs. The sad reaction to fourth-quarter figures has now perhaps clouded the likelihood of this scenario playing out.
Short sellers might now have on the agenda c trick greater reasons to believe that their bearish calls can be vindicated. However, it’s also true that those who started betting against the stereotyped at the beginning of the year still need the shares to fall a fair bit more to recoup their losses.