Netflix NFLX has severe negative cash flow & toppy chart action

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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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12:35AM EST June 6, 2016 99.59 last NFLX            
Comment: 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.
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+1 on the TSLA comparison
Great idea. I'd hold this if in, but got shaken out.
Going well.
+1 Reply
Beautiful chart, although RR of 1.76 is a tad low. I prefer RR 1:3 or above, that way one good trade will cover losses from three bad trades.
timwest HermanBrummer
Thanks Herman - Actually, Risk/Reward of 1:3 isn't necessary to be successful. If you can pinpoint 80% winners, you can have up to 2 units of risk to 1 unit of return and still be solidly and consistently profitable.
ok Tim
Good job !
+1 Reply
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