Netflix Inc. (NFLX) “received a Sell rating” (sorta) from Greenlight Capital’s hedge fund manager David Einhorn. In his quarterly letter, as first reported by ValueWalk. Einhorn said investors are valuing the company on the amount spent to up the subscribers count rather than the traditional valuation metrics.Netflix Inc. (NFLX) A "Sell" Believes David Einhorn

Rising costs alarming for Netflix

The letter stated that even though there has been a promising increase in the Netflix’s subscriber count, there are various other factors that the investors are overlooking.

Einhorn mentioned that the streaming company is playing on its strategy of cutting down the profit to increase the number of subscribers in the future years. This raises a question that how much profit the company would earn by adding additional subscribers. When the value of a user is compared with a user acquisition cost, it discloses the level of profits would be lower, raising concerns over the company’s strategy.

Netflix Inc. (NFLX) – Original content strategy may back fire?

Right now, Netflix is driving on the back of its successful original content strategy. Einhorn however, believes the content is expensive, and its cost is estimated to increase to $5 billion in 2016. Additionally, he noted there is no guidance from the company over the estimated cost of the content it produces. Further, the hedge fund manager said there are no ratings to conclude the consumption of Netflix content, adding most of the content excitement is due to the analysts, who have links in investment banking.

Even though Netflix’s original contents sit high on success, it is not necessary it will always remain so, said Einhorn, noted this to the major reason why content producers sell at only 10-15xEBITDA. Citing an example of Marco Polo, which costs over $100 million, Einhorn believes self-produced contents is very costly.

EPS estimates going down

In the previous two-quarters, Einhorn feels Netflix performed below the consensus expectation, and therefore, Wall Street is now lowering its estimates. Now, the 2016 consensus EPS estimates are approximately 50% lower than analysts’ forecast 90 days ago. Einhorn believes Netflix’s, which is currently trading 150x reduced 2016 estimates, valuation to be rich. Going forward, Netflix is looking to expand in countries such as China, India and Russia, who are known to be piracy hot spots, thus could result into loss of revenue for the company.

At around 11 am EDT, Netflix shares are down 2.74% at $111.66, and year to date, the stock is up over 127%.