David Einhorn has just sent out Greenlight Capital’s second-quarter letter to investors.
After going briefly over the fund’s performance (down 1.5% in the second quarter and 3.3% for the year), Einhorn jumped right in and slammed Netflix.
Here’s an excerpt:
On April 15 after the close, Netflix (NFLX) announced its results for the first quarter and conducted a conference call. NFLX shares had already risen 39% in 2015 and were trading at more than 100x 2016 estimates with analysts expecting adjusted earnings for the quarter of $US0.63. NFLX achieved just $US0.36. Prior to the call, the June quarter consensus stood at $US0.86; by the next morning consensus was $US0.30. All told, analysts slashed estimates for the next three years. Further, we had just finished watching season three of NFLX’s leading original content show, House of Cards, which appeared to be scripted to compete with Ambien.
If you’d told us the news in advance, we’d have guessed it was going to be a bad day for NFLX holders, but apparently Red Ink is the New Black. The shares opened the next morning 12% higher and never looked back. By the end of the quarter, the shares had almost doubled for the year, making NFLX the best performing stock in the S&P 500 by far.
Why did the stock react that way? Cynically: if it soared on bad news, imagine what it would do with good news. Practically: NFLX changed its story and pushed its promises into the distant future, with grand hopes for the decade starting in 2020. It transitioned from being a company judged by how much it earns into a company judged by how much it spends. Whether the spending proves successful won’t be known during the investment horizon of most NFLX shareholders. In today’s market, the best performing stocks are companies with exciting stories where accountability is in the distant future.