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  • Tobias Carlisle, founder and portfolio manager of The Acquirers Fund — a long/short deep-value exchange-traded fund — thinks Netflix’s stock could get cut in half.
  • He builds his thesis around lofty-valuations, increasing content costs, and a plethora of emerging competitors.
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There’s no denying that FAANG stocks — consisting of Facebook, Amazon, Apple, Netflix, and Google/Alphabet — are one of Wall Street’s most treasured and adored cohorts.

But not are all sold on a prosperous future for every component. In fact, one portfolio manager in particular has singled out a stock he thinks makes the perfect short: Netflix.

“You can look at Netflix on a valuation basis, and on any ratio or multiple it’s extremely expensive,” said Tobias Carlisle, founder and portfolio manager of The Acquirers Fund, on We Study Billionaires, an investing podcast. “The only way that this sort of makes sense as an investment on the long side, is if it keeps growing at this very high rate.”

Tobias is best known as the author of The Acquirer’s Multiple, Concentrated Investing, Deep Value, and Quantitative Value. Prior to forming The Acquirers Fund, he was an analyst at an activist hedge fund.

As of today, Netflix has a price-to-earnings ratio of 115, a price-to-book ratio of 21, and an enterprise multiple of about 70. These metrics look tech-bubble-esque — and when valuations are priced to perfection, the slightest mishap in earnings can pull the rug out from under investors.

In fact, that’s exactly what happened when Netflix reported second-quarter earnings. During the period, the streaming giant reported a loss of more than 100,000 subscribers, against expectations of a 300,000 gain. And Wall Street was relentless in their punishment. The stock plummeted more than 10%.

But lofty valuations aren’t the only thing that Carlisle is worried about, he’s also keeping a close eye on growing costs and emerging competitors.

Read more: Global central banks are making investors pay to stash their money. An investment chief overseeing $4.5 billion explains why that would be a disaster for the US.

“The kind of business that Netflix is in, is more like a movie studio now — in the sense they have to produce this really great content,” he said. “Content is becoming very, very expensive by historical standards.”

In short, in order to stay relevant, Netflix constantly has to pay up for engaging, binge-worthy content — and that content is not cheap. It requires a ton of cash, and the show/movie that they’re paying for isn’t guaranteed to be a hit. If their purchase falls flat on its face, they’re left holding the bag. It happens to movie studios all the time. 

In addition to lofty-valuations and increasing content costs, Carlisle references a plethora of emerging competitors set to eat into Netflix’s lunch. 

Disney has got very good at figuring out what people like,” he said. “So now Netflix is just going to be going straight head-to-head with a great content producer, that’s going to have its own distribution in the same way through Hulu, and through its own app.”

Disney owns Marvel, ESPN, Lucasfilm, Pixar, and boasts the world’s greatest library of children’s entertainment. That’s a lot of great content. And in today’s environment, consumers flock to the platform that offers the most bang for their buck.

This spells trouble for Netflix, and that’s not even taking in to account free platforms like YouTube, where the content costs are zero, and viewership is growing.

“What I do think happens is that it becomes incredible hard for it to sustain that enormous valuation,” Carlisle added. “As that happens, the valuation comes down, it could be trading half where it is.”

SEE ALSO: Global central banks are making investors pay to stash their money. An investment chief overseeing $4.5 billion explains why that would be a disaster for the US.

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