Netflix, Inc. (NFLX): Does The Least Favored FANG Stock Have Room to Grow?

We track more than 800 hedge funds and measure the performance of their long stock picks in real time. We created a giant $1.6 trillion portfolio of hedge funds’ long positions and while it is true that hedge funds had some high profile losses this year that are “celebrated” by the media, their stock picks actually outperformed the S&P 500 Total Return Index by 50 basis points and the Russell 2000 Index by 410 basis points during the first 2 months of this year. So, on average it is a good idea to pay attention to what hedge funds are doing. Keeping this in mind, let’s take a look at the hedge fund activity in Netflix, Inc. (NASDAQ:NFLX).

Netflix, Inc. (NASDAQ:NFLX) has experienced an increase in activity from the world’s best hedge funds in recent months. Shares of the online streaming service provider were in the portfolios of 64 of the funds tracked by Insider Monkey, up from 57 on September 30. Those 64 investors held $7.47 billion worth of the company’s shares. While the other so-called “FANG” stocks: Facebook Inc (NASDAQ:FB), Amazon.com, Inc. (NASDAQ:AMZN), and Alphabet Inc (NASDAQ:GOOGL) (OK they’re technically the FANA stocks now that Google has changed its name) are three of the most popular stocks among the investors that we track, Netflix has failed to capture the same enthusiasm, having less than half of the investors of those other three growth stocks.

David Einhorn of Greenlight Capital perhaps best summed up the bearish case against Netflix when he said this about the company’s 2015 first quarter results in his second quarter letter to investors:

“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 $0.63. NFLX achieved just $0.36. Prior to the call, the June quarter consensus stood at $0.86; by the next morning consensus was $0.30. All told, analysts slashed estimates for the next three years. 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.”

Short interest in Netflix rose eight-fold between April 15 and 30, yet the stock plowed through the shorts and nearly doubled over the next few months, helped in part by a 7:1 stock split on July 15. Netflix is undoubtedly shaking up the broadcast TV world, with a recent study from MoffettNathanson showing large declines in viewership of numerous high profile TV broadcasters among Netflix viewers. Nonetheless, Netflix trades at an astounding P/E of over 361 and is already beginning to experience flagging U.S subscriber growth, which missed estimates in the first quarter of this year, though international figures were strong. However, Netflix’s EPS widely missed its own estimates of $0.19, coming in at $0.10, only topping analysts’ estimates because they had been severely cut back to quite low expectations, as Einhorn mentioned above. Short interest in Netflix hit an all-time on February 12 and the stock is down by 11% this year and may not make a meaningful rebound until Netflix surprises with user growth or begins to show that it can still make money as its expenses rise.

Nonetheless, top money managers see more room for growth and are moving into the stock. On the next page, we’ll take a glance at the latest action encompassing Netflix, Inc. (NASDAQ:NFLX).