Netflix NFLX has severe negative cash flow & toppy chart action

Netflix may be on of my favorite monthly subscriptions and my kids love it too, but NFLX is bleeding cash flow. Investors are paying up to 6 times in market capitalization for every $1 in revenue at Netflix. And although NFLX is reporting a profit, after tax, when you factor in the investments they need to make to grow the business, the story begins to come apart at the seams.

$7 billion in revenue seems very impressive indeed, which has doubled in just the last 3 years, but to buy a company for $42+ billion in market cap while it is losing nearly $1 billion and accelerating down steadily over the past year gives me a cramp in my stomach. It seems to me that the same logic that is omnipresent in investment circles for Tesla, which has similar issues in valuation and free cash flow, doesn't apply to Netflix.

I therefore think that NFLX has a reasonable chance at testing below $80 and as low as the low $60's before it becomes safer to own shares.

If you have never shorted a stock before in your life, then at least learn more about how it works and the risks involved. The old saying is surely true, that you can lose a lot more than you can make. Short selling is not for everyone, but you can also just sell call-spreads where you collect premiums from call buyers, but also hedge by protecting yourself from further crazy valuations. For example: You could sell the December 100 call options and buy the Dec 120 call options and this way you can define your risk to a maximum loss of $20 per spread (100 shares per contract), less the premiums you receive.

For the technician: There is a large double-top pattern at the $130 level and a long term trendline that broke going back 3 years. The price pattern might also be a "head & shoulders top" but the point here is that NFLX peaked back in August nearly a year ago and is struggling here at a level that may stop further advances as old buyers cash out here at "breakeven".

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Tim

12:35AM EST June 6, 2016 99.59 last NFLX

Komen:

NFLX "short position" has been profitable in waves from the start and yet this idea isn't dropping meaningfully yet. I will stay with the position and double-up the position and lower the stop to $110 from $120.