Monday, November 15, 2010

Could Netflix (NFLX) Be a Good Short?

I like Netflix. I'm a customer, the service is a great value, plus it is an important weapon in the culture war against the civilization-destroying propaganda pushed by the cable companies.

I'm also a fan of the investing blog Stableboy Selections, which did a post this summer about shorting Netflix. I thought he raised an interesting point about the way Netflix accounts for DVD acquisition costs:

Whenever I short a stock I make sure that the accounting is aggressive–this is like a margin of safety in case the operations of the business do not deteriorate as expected. Netflix capitalizes its DVD acquisition costs over a useful life of three years instead of expensing them when incurred. This adds a degree of subjectivity to what the company is truly earning.
I checked the Netflix 10-K
We amortize our direct purchase DVDs, less estimated salvage value, on a “sum-of-the-months” accelerated basis over their estimated useful lives. The useful life of the new-release DVDs and back-catalog DVDs is estimated to be one year and three years, respectively. In estimating the useful life of our DVDs, we take into account library utilization as well as an estimate for lost or damaged DVDs. For those direct purchase DVDs that we estimate we will sell at the end of their useful lives, a salvage value is provided. For those DVDs that we do not expect to sell, no salvage value is provided. We periodically evaluate the useful lives and salvage values of our DVDs.
Does Netflix really sell its used DVDs?

Anyway, I'm not shorting NFLX. The names that are already in the Credit Bubble Stocks short portfolio (MGM, GBE, WGO, etc) are much better shorts. But, I thought this was an interesting discussion.

No comments: