Whitney Tilson on Why He's Long Netflix

Noted value investor Whitney Tilson, of T2 Partners, is on CNBC, talking about a wide variety of topics, including why he went long Netflix NFLX yesterday. Scott Wapner asked him about his sentiment on the market, and Tilson said that he was bearish in the beginning of the year, and then as the market turned around in the spring and things got very bearish, he felt that the markets had overshot themselves to the downside. Tilson thinks that the "U.S. and Europe will "muddle through" their economic predicaments, and that nothing major will happen anytime soon. Tilson, a value investor, said that he makes money fighting the tape, including his investment in BP BP, and Netflix, which he famously shorted last year, and then ultimately bowed out of the trade after the stock continued to run higher. Waprner asked him why he's long the company run by Reed Hastings, after having been wrong on it before. Tilson said that the current position is not a "mega position," and on any number of metrics, he believes Netflix is cheap. It went from a $16 billion market cap just a few months ago to the current $4 billion it today. He believes it is a strong company, and that the selling is way over done here. When Netflix reported its earnings on Monday, it announced that it had lost 800,000 subscribers, and is now down to less than 24 million subscribers. Tilson believes that the additional $5 per subscription increase on the DVD service will help offset the decline in subscriptions. Tilson believes that the future of the business is in streaming, and that Netflix is cheap when valued on a cost per subscribers. He also mentioned it as a potential takeover candidate, by companies like Google GOOG or Amazon AMZN. He does not think a takeover is likely, but he feels that it does put a floor in stock. Tilson mentioned that Netflix is generating about $12.50 in revenue per subscriber. It could easily generate $1.7 billion in cash flows, which is very cheap for a $4 billion market cap company. Tilson called Netflix "crazy cheap," as the company is making a bet on streaming, similar to what Hastings did a few years ago with DVD rentals, when it went head to head with Blockbuster. The company lost 75% when it did that, and it turned out to return 3000%. He said that he can not comment on whether he talked to Reed Hastings, though Tilson did say that he is a visionary, and admitted the mistakes he made regarding Qwikster. He thinks the price increase would be right over the long term, although it might kill the stock in the short term, and cost him subscribers, which it has. Subscribers are still rising in streaming only, and Tilson thinks that streaming subs could rise as much as 30%. Tilson also mentioned that he was short salesforce.com CRM, and thinks that the stock could fall 75% to get to fair value. Tilson mentioned that the position is a "fairly sizable bet" in his position. He is also short Green Mountain Coffee Roasters GMCR which he announced he was short at the Value Investing Congress. Tilson also discussed positions in Sandisk SNDK, which he is long, Nokia NOK, which he is short, and Microsoft MSFT, which he is long.