Whitney Tilson, Former Netflix Bear, Buying Company’s Shares After Plunge

By Kelly Bit - Oct 26, 2011 3:46 AM GMT+0700

Whitney Tilson, co-founder of T2 Partners LLC, said he bought shares of Netflix Inc. (NFLX) after it tumbled the most in seven years following reports that the video-rental service lost 800,000 U.S. subscribers in the third quarter.

Tilson had bet against Netflix from at least December, when he first wrote about shorting the stock, until February, when he disclosed to investors in a letter that he covered the short and was no longer confident that his investment thesis was correct. Tilson said he decided to buy shares today because he deemed them “cheap.”

“It’s been frustrating to see our original investment thesis validated, yet not profit from it,” Tilson, 44, said in a statement e-mailed from his New York hedge fund. “The core of our short thesis was always Netflix’s high valuation. In light of the stock’s collapse, we now think it’s cheap and today established a small long position. We hope it gets cheaper so we can add to it.”

Netflix plunged 35 percent to close at $77.37 in New York trading, its biggest drop since Oct. 15, 2004. The shares have declined 56 percent this year.

In a short sale, an investor borrows a security and sells it, expecting to profit from a decline by repurchasing it later at a lower price.

Tilson’s purchase was reported earlier today by the Wall Street Journal.

Subscriber Revolt

Netflix’s outlook suggests it’s been unable to contain a subscriber revolt over a price increase and aborted plan to force subscribers into separate streaming and DVD services. The Los Gatos, California-based company now forecasts losses in 2012 because of costs to offer content in the U.K. and Ireland, and said it will delay further expansion until profitability is restored.

Domestic subscribers fell to 23.9 million as of Sept. 30 from 24.6 million three months earlier, a bigger decline than the company projected in September, according to a website statement yesterday. Subscriber growth is particularly important because Netflix has used its lead over U.S. rivals to finance growth in its streaming business and expand overseas.

Netflix has plummeted 74 percent from a record close of $298.73 on July 13, the day after the company announced it would charge $7.99 each for the mail-order and streaming services, instead of $9.99 for both.

To contact the reporter on this story: Kelly Bit in New York at kbit@bloomberg.net

To contact the editor responsible for this story: Christian Baumgaertel at cbaumgaertel@bloomberg.net