Why Citron Research Hates Netflix (NFLX), Inogen (INGN), Likes This Social Media Company

Citron Research is one of the most respected short sellers in the financial world, owning a lengthy history of correctly predicting stocks that would eventually run into difficulties both minor and major. According to Wall Street Journal analysis, of Citron’s 111 short-sale reports issued between 2001 and 2014, 90 of the stocks covered were down a year after the report, while just 21 were up.

In this article we’ll cover three of Citron’s latest reports, including their bearish calls on Inogen Inc (NASDAQ:INGN) and Netflix, Inc. (NASDAQ:NFLX), both of which have shrugged off Citron’s calls thus far. We’ll also check out Citron’s bullish take on Snap Inc (NYSE:SNAP).

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Inogen Inc (NASDAQ:INGN)

Citron released a report on Inogen on May 24 which called for a nearly 50% contraction in the stock as a best-case scenario. Inogen Inc (NASDAQ:INGN) has gained over 500% since the beginning of 2016 and more than 50% in 2018. Citron believes Inogen’s valuation has completely lost touch with reality, trading at 2x to 3x the revenue and EBITDA multiples of its peers.

Citron noted that Inogen Inc (NASDAQ:INGN) appears to be getting credit as a disruptor in its field despite being a single product company (oxygen concentrators) selling a fairly standard product in a field with low barriers to entry and Medicare rates that are anticipated to fall alongside the traditional oxygen market. Nor is Citron at all bullish on the company’s ability to stave off rising competition given that it devotes a meager 2% of its revenue to R&D, a fraction of what its peers do, and has no pipeline of products on the horizon.

Following the release of Citron’s report, Inogen shares fell by 8%, but quickly made up those losses and have continued to move higher. In response to some of the points made by Citron, Needham analyst Mike Matson declared that Inogen’s valuation isn’t unreasonable given its growth rates, and wrote that its R&D spending is sufficient. He has a $215 price target on the stock.

On the next page we’ll look at Citron’s bearish thoughts on Netflix, Inc. (NASDAQ:NFLX) as well as its surprisingly bullish take on this social media company.

Netflix, Inc. (NASDAQ:NFLX)

Citron’s latest report took aim at Netflix, calling for the stock to retreat by 13% to the $340 mark. Such a pullback would still leave Netflix with gains of 70% in 2018 and would only pull the stock back to late-May levels. Unlike in Inogen’s case, Citron’s report did nothing to slow the relentless advance of Netflix shares, which gained 3% on the day it was released.

Citron’s case against Netflix, Inc. (NASDAQ:NFLX) focused on the glut of wealthy competitors in the streaming space or about to enter it, including Apple Inc. (NASDAQ:AAPL), Alphabet Inc (NASDAQ:GOOGL), Walt Disney Co (NYSE:DIS), and Amazon.com, Inc. (NASDAQ:AMZN). According to Citron, none of those competitors even need to beat Netflix for the company’s stock to start feeling the pain, all they need to do is slow Netflix’s growth.

Citron also notes that if Wall Street began to judge Netflix as a media company rather than as a tech company, which is arguably how it should be classified, its numbers don’t look at all elegant when compared to the overall revenue and free cash flow generation of media behemoths like Disney and Comcast Corporation (NASDAQ:CMCSA).

Snap Inc (NYSE:SNAP)

Unlike Citron’s two aforementioned bearish calls, the market has actually responded most strongly to the short-seller’s bullish call on Snap Inc (NYSE:SNAP) at the end of May. Snap shares have jumped by 23% since then to top $14, having already closed nearly half the distance to Citron’s $17 call.

Citron believes that shorts have stayed in the stock for too long, pushing shorted shares near record highs even as the stock had already plunged to record lows, pushing its valuation down to obscenely low levels. In fact, in little more than a year, Snap has gone from being the most expensive social media stock to the least expensive, trading at an enterprise value of just 3.4x estimated 2021 sales. That’s nearly half of Twitter Inc (NYSE:TWTR)’s 6x figure, despite Snap growing revenue at more than twice Twitter’s pace so far in 2018 and having more users (and far more users in the coveted teen demographic).

Citron believes Snap may not last long as a public company, given how attractive it looks as a takeover target for a larger tech company at its current valuation. Consider that Alphabet Inc (NASDAQ:GOOGL) reportedly offered as much as $30 billion for Snap two years ago and the company has done nothing but triple revenues and double its daily active users since then, yet currently has a market cap of just $17 billion. But most importantly of all for the bull case…Kylie Jenner is back on Snap!

Disclosure: None