Since tumbling to a 5-year low in May, shares of Netflix (NFLX) have rallied steadily to a 4-month high on Monday. Optimism that the company can revive growth with new features is pushing the stock higher. Also, better-than-expected quarterly earnings results and the success of the latest installment of the show “Stranger Things” has fueled a rally in the stock.
Netflix has rallied 50% from its May low and has burned short sellers of the stock, who borrow shares and sell them, hoping to repurchase them at a lower price to profit from the difference. Since May’s 5-year low, short-sellers of Netflix have seen $996 million in mark-to-market losses, according to S3 Partners.
At its May low, Netflix was down 72% for the year as the company faced stiffer competition, customers who were getting squeezed by rising inflation, and the end of the pandemic-fueled streaming boom. Mirabaud Securities said, “bearishness was extreme as the stock got to oversold levels and traded at a massive discount to trend valuation, to peers, and to history.”
The recent rally in Netflix signals optimism about the start of the company’s much-anticipated version of its streaming service that will carry advertising for the first time. Also, a crackdown on password sharing and better-than-expected second-quarter subscriber loss are supportive of the stock. The company also forecast growth in its subscriber base after two-quarters of contractions.
Short sellers of Netflix who have thrown in the towel after the recent rally has added fuel to the up move. In the past month, short sellers have bought back about 2.4 million shares worth $599 million, according to S3 Partners. The valuation of Netflix shares is still cheaper even after the recent rally. They are priced at less than 23 times profits projected over the next 12 months, well below the 10-year average of 80 times. The Nasdaq 100 Index ($IUXX) (QQQ) is at 24 times, while the S&P 500’s ($SPX) (SPY) price-earnings ratio is 18.
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