Whitney Tilson ‘Why We Still Have Not Lost Our Mind’ Take II


Whitney Tilson’s commentary below:

Netflix probably did the right thing by raising $400 million.  It more than triples the company’s net cash position from $166 million to $566 million and removes nearly all liquidity risk.  When you’re betting on a medium- to long-term turnaround, you first have to make sure that the company doesn’t hit a cash shortfall in the short term.  We believe that Netflix will start to grow and thrive again in a year or two, but neither we (nor the company or anyone else) can predict with certainly what will happen in the next 12 months, so this capital raise is a good insurance policy.


This Tiger grand-cub was flat during Q2 but is ready for the return of volatility

Tiger Legatus Master Fund was up 0.1% net for the second quarter, compared to the MSCI World Index's 7.9% return and the S&P 500's 8.5% gain. For the first half of the year, Tiger Legatus is up 9%, while the MSCI World Index has gained 13.3%, and the S&P has returned 15.3%. Q2 2021 hedge Read More

That said, it is irritating to see a company we own issuing stock at 1/3 the price at which it was buying it only months ago – yet another example of the capital misallocation decisions that are all too common in Corporate America.  It’s really quite simple: if a company has excess cash and its stock is deeply undervalued, it creates value to buy it back; conversely, if a stock is obviously wildly overvalued, then a company is creating value by issuing as much stock as possible, either to buy real assets, raise cash, or pay employees.  It’s one of the dangers of shorting high-flyers: if they’re clever, they can use their overvalued stock to create real value.  For example, Salesforce.com, which we remain short in size, is actually being smart by paying employees as much as possible via stock options.  Conversely, Green Mountain, which remains our largest short position, should have used cash rather than stock for its acquisitions over the past two years, both because of the rich valuation of its shares and because it generates no free cash flow.  Similarly, Netflix should have done a big secondary and issued a lot of stock in the $200-$300 range.


Here’s the updated guidance from NFLX:


NFLX Netflix provides updated guidance in automatic shelf registration filing from 22-Nov ($74.47)

  • ·         NFLX included an updated outlook in its S-3ASR filing from yesterday evening
  • ·         Updated Guidance:

o    Consistent with its Q4 guidance, domestic streaming and DVD gross cancellations continued to steadily decline in Oct and the first half of Nov, while gross additions of new streaming subscribers remained strong.

o    As a result, consistent with its prior guidance, NFLX continues to expect its domestic streaming net additions to be about flat for Nov as a whole and strongly positive for Dec.

o    NFLX expects that consolidated quarterly revenue will be relatively flat until it can achieve positive net subscriber additions.

o    As a result of the relatively flat consolidated revenues and previously announced increased investment in its International segment, NFLX expects to incur consolidated net losses for the year ending December 31, 2012.

o    NFLX cannot assure that its domestic streaming cancellations will continue to decline or that gross new additions will remain strong.

o    If it is unable to repair the damage to its brand and reverse negative subscriber growth, its business, results of operations, including cash flows, and financial condition will continue to be adversely affected.

  • ·         Prior Guidance:

o    Recall on 24-Oct, NFLX guided for a consolidated net loss in Q1 2012

o    When asked on the Q3 earnings conference call whether it expected its H2 2012 profitability to overcome the losses guided for early 2012, meaning to break-even for FY 2012, management replied that it had not yet guided the latter half of 2012.


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