Morning Brief: Most — Not All — Managers Cheer Netflix Numbers

January 24, 2018   Stephen Taub

The streaming video giant reported much better results than analysts were expecting, but at least one manager is still skeptical.

Shares of hedge fund favorite Netflix surged about 10 percent, to close at $250.29, after the streaming video giant reported much better results than Wall Street was anticipating for the fourth quarter. In response, several investment banks raised their earnings estimates and their target prices. For example, Credit Suisse boosted its target from $224 to $266. However, it maintained its neutral rating on the stock, stressing that the big boost in revenues at the company was partially offset by higher content costs.

UBS, however, raised its price target from $250 to $290 and maintained its buy rating, stressing it sees Netflix "clearing a fairly high hurdle against investor expectations." It raised its revenue forecasts, asserting that the company’s outlook "is positive."

At the end of the third quarter, at least 117 hedge funds held a position in the stock, 20 more than the previous quarter, according to research and analytics firm Novus. Of those, 24 funds counted Netflix among their top-ten holdings, according to Goldman Sachs. The largest hedge fund investor was SRS Investment Management, which owned nearly 10.5 million shares, making it the Tiger Grandcub’s largest U.S. equity holding. SRS is headed by Karthik Sarma, who earlier worked for Chase Coleman’s Tiger Global Management. Other Tiger Cubs who count the stock among their top-ten holdings include Viking Global Investors, Coatue Management, and Tiger Global Management.

One manager who is not cheering Netflix’s results is David Einhorn of Greenlight Capital. His short position in the stock was one of his biggest losers last year. In his third-quarter letter, the long-short hedge fund manager asserted that Netflix "continues to accelerate its cash burn as it desperately tries to compensate for its inability to rely longer-term on licensed content." This is what makes a market.

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Hedge fund investors once again are chasing returns. As the stock market surged to its best year since 2013, investors pumped $30 billion into equity strategies last year, according to eVestment. This inflow was the third highest since the financial crisis, following higher sums in 2014 and 2010, which just happened to follow huge gains in the equities markets. Alas, this may be bad timing.

"Historically this has been a bad sign for equity market," eVestment states in its latest monthly data report. "In each instance the following year equities experienced low annual returns." In 2015 the Standard & Poor’s 500 stock index returned just 1.4 percent, while in 2011 it rose just 2.1 percent. The hedge fund data collector also points out that December redemptions from hedge funds in general were $8.35 billion, the lightest level of redemptions in December since 2010. December also marked the fourth straight quarter of outflows for macro funds. For the full year, total hedge fund industry net flows amounted to $30.13 billion, boosting total industry assets to a record $3.276 trillion, according to eVestment.

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Shares of hedge fund favorite Alibaba Group Holding surged 4.5 percent, to close at $192.24, despite no apparent significant news. At the end of the third quarter, the Chinese e-commerce giant was the tenth-most-popular stock among hedge funds, with at least 185 holding a position, according to Novus.


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