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#MoneyBeat Netflix’s Massive Rally Draws Attention of Skeptics

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Netflix Inc.’s stock price surge is finally bringing out the bears.

The streaming video giant’s stock is down 4.9% in the first two days of the week to about $316, a rare pullback for shares that have more than doubled over the last 12 months and climbed 22% in the last month alone. The gains have outshone many of Netflix’s high-flying tech-focused peers.

The recent drop followed remarks by short-seller Andrew Left of Citron Research, who said in a tweet Monday that shares, “can be shorted back to $300,” after the company’s market cap surged in the preceding week.

“I think the market has become over-enthused by the product and not realistic about the economics,” he said in an interview. Mr. Left, who is known for shorting such companies as Valeant Pharmaceuticals International Inc., said he is currently betting against the stock.

Netflix shares have a long history of momentum-driven growth that’s drawn passionate arguments from both bulls and bears. The company has posted consistently strong subscriber growth and invested heavily in its original content. It’s also been burning through cash and borrowing heavily. It faces a slew of upstart rivals, from Amazon.com Inc. to Walt Disney Co.

Scott Devitt, an analyst at Stifel, recently dropped his rating on the company to “hold,” from “buy.” In a report to clients last week, he wrote that the “share price may have sprinted ahead of fundamentals in the short-term.”

The company’s chief executive, Reed Hastings, has counted himself among the stock price skeptics in the past. In the summer of 2015, when the stock was at about $100, Mr. Hastings said in response to a question about whether the stock is overpriced: “when the stock was half this price, I described it as euphoric. So it’s a mystery to me.”

Still, the recent surge has its benefits, the company has said. In a recent quarterly letter, the company noted that a thick “equity cushion” has been good for its borrowing in the junk bond market. The company has about $6.5 billion in total debt, according to FactSet, and its bond prices have held up relatively well recently. A spokesman for the firm declined to comment.

The Netflix critics have had a tough run recently. The stock had an average short position worth $5.5 billion so far this year, which has sustained paper losses of nearly $3 billion in 2018 through the end of last week, according to financial analytics firm S3 Partners. So far this week, they’ve made back about $319 million.

Short sellers bet against a stock by borrowing from a lender and selling it, hoping to buy it back at a lower price when they return it later on. They pocket the difference if the stock has fallen, but can expose themselves to sharp losses if it rises, as Netflix has done.

The number of shorted shares has fallen recently as investors pared their positions. Many have bumped up against limits on how much risk they can take as the stock price has risen, according to Ihor Dusaniwsky, managing director of predictive analytics at S3. Short interest as a share of float hit an all-time low of just under 5% last month, as fewer shares were shorted and the number of outstanding shares increased.

– Ken Jimenez and Sam Goldfarb contributed to this article

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