The Jupiter Absolute Return fund has revealed it has been shorting Netflix for over a year, arguing the company “would never have grown so much” in another monetary environment.
“For such eye-watering valuations, you would expect the company to be operating a highly profitable, wide-moat business with no contenders for the throne,” says analyst on the fund Ivan Kralj.
The $41bn company is currently trading on 408x price to earnings and 133x enterprise value to Ebitda.
The US business has been burning through cash to create original content, while raising funds via debt and equity issuance, says Kralj.
“The company would never have grown so much were it not for the unique monetary environment we are now in, and it needs its cost of capital to remain low in order to remain on this hamster wheel of debt issuance and content creation.”
Kralj describes Netflix plans to increase original content from 10 per cent to 50 per cent of the platform is risky, citing estimates than 80 per cent of movies and television series make no money.
“Netflix has spent $4bn on content in the first six months of 2016 alone, and has committed to buying an additional $10bn in the coming years. The company is barely profitable, with wafer-thin margins, and continues to burn cash at an accelerating rate.”
Furthermore, Kralj says Amazon Prime is boosting its subscriber base at a faster rate, while Hulu, Sony, HBO, Apple, YouTube, Yahoo are also trying to jump on the ‘over-the-counter’ market “all borrowing a lot of money and writing billions in content checks”.
“Danger also lies in the fact that Netflix outsources its distribution technology to Amazon Web Services,” Krajl says.
“It is naive to assume that Amazon is not using this relationship to learn and gain a competitive advantage in its Prime Video business.”