Netflix Stock Investors Should Chill Until the Short Squeeze Ends

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Netflix (NASDAQ:NFLX) is now worth more than Walt Disney (NYSE:DIS). Just like Babe Ruth said 90 years ago, when he signed a contract to be paid more than President Herbert Hoover, NFLX stock is having a better year.

Netflix Stock Investors Should Chill Until the Short Squeeze Ends

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Netflix reported earnings of $709 million, $1.57 per share, on revenue of $5.77 billion for the quarter ending in March. More important, it gained 15.77 million paid subscribers, up 23% from last year to 182.9 million.

The new subscriber figure was twice what was expected. Most of the growth came outside the U.S., a market rivals have barely touched.

Netflix is Chill

Wait, I hear you say. A $187 billion market cap for a company that just reported earnings of $709 million? A price to earnings ratio of 85 in a world where Microsoft (NASDAQ:MSFT) trades at 30?

It’s a new kind of rush to quality. Where in past crises investors rushed into the U.S. dollar or hard assets, today they’re rushing into anything that resists the novel coronavirus. Netflix resists the virus like nothing else.

As one writer put it, “subscribing to Netflix is no longer a choice.” The company’s streaming entertainment service is replacing cable TV at a ferocious pace. AT&T (NYSE:T) is now worth just $25 billion more than Netflix.

Netflix once had ambitions to be a cable TV channel, like AT&T’s HBO. It once sought to be a movie studio like CBSViacom’s (NASDAQ:VIAC) Paramount. Now consumers are ending their $150 a month cable contracts in droves and switching to Netflix’ $13 a month service. Many are also getting the $10 a month Amazon.com (NASDAQ:AMZN) Prime, which comes with free shipping. Add the Disney bundle with Hulu and they’re still spending a fraction of what they were before.

Netflix says it has enough new content to get through 2020, even though its production has been halted by the virus. While rival studios are stymied from reaching the public, Netflix is getting viewers without spending money.

As Good as It Gets?

The problem, Netflix bears will tell you, is that this is as good as it gets. Once stay-at-home orders are lifted, people will turn off their TVs and go outside.

That’s why the latest move up in Netflix may be a short squeeze. The short volume ratio for the stock on April 22 was 30.33%. That’s higher than Tesla (NASDAQ:TSLA), the previous short champion. Just a few weeks earlier, on April 9, it was under 19.

Netflix management knows their advantage will pass, so they’re raising $1 billion of debt, in dollars and euros. That will bring long-term debt to more than $15 billion, on assets of $35 billion.

Netflix is also taking the opportunity to burnish its image. It’s putting 35-40 hours of documentaries on Alphabet’s (NASDAQ:GOOGL) YouTube service, where they will stream for free.

Netflix is also becoming more transparent on viewer numbers, figures it formerly hoarded like state secrets. Spenser Confidential, a movie starring Mark Wahlberg, was watched by 85 million households in the first quarter. The documentary series Tiger King was seen by 64 million. The Spanish language La Casa de Papel, or Money Heist, was watched by 65 million. A typical prime time show on TV is lucky to be seen by 10 million.

Bottom Line on NFLX Stock

You will get a better handle on NFLX stock’s true value when the short squeeze ends, when the traders and speculators go back home

Once the short interest declines, the share price will fall. Only then should you decide whether to invest. Only then will you see Netflix stock’s real value. My guess is that will happen once big states like California and New York start to lift their quarantines.

The real value of Netflix, however, will still be huge. Once that value is revealed, Netflix should be a stock worth investing in.

Dana Blankenhorn has been a financial and technology journalist since 1978. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in AMZN and MSFT.

The post Netflix Stock Investors Should Chill Until the Short Squeeze Ends appeared first on InvestorPlace.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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