New stock pick: Long Netflix (NFLX) & Short Blue Nile (NILE)

By: ispeculatornew
Date posted: 04.26.2010 (5:00 am) | Write a Comment  (1 Comment)

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Since I am able to close out a trade this morning, it also means I can enter a new one. I am going with two companies that I have traded against each other with great success earlier this year. The main reason for the trade remains the valuation mismatch between the two. While Netflix (NFLX) has continued to show strong growth, especially compared with Blue Nile’s (NILE) fairly flat numbers, the ratios continue to not show this. The main reason probably is of course that Netflix faces very serious competition in online video while Blue Nile has little competition in its exact market (online jewelers). But, Netflix has been able to adapt far better than competitors in recent months, especially gearing up for consumers that use other devices such as Apple’s Ipad, or gaming consoles like the Wii or the XBox.

So I personally feel comfortable getting into this position, hoping that the growth of both companies remains stable, which would no doubt take Netflix higher.

Blue Nile is one of those companies that is difficult to figure out. It has a great business model and I would think that it would eventually be a great investment. But growth has not been anywhere close to what would justify P/E ratios close to 50. Just take a look at traffic estimates from compete.com, which show a 30% decrease in visitors for the past year, not exactly impressive:

And finally, take a look at stock charts for both companies:

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1 Comment

  1. […] turned out for the better, with Netflix jumping today on acquisition rumors, it helped the trade on Netflix (NFLX) and Blue Nile (NILE) reach +24,14%. The return was much higher during the morning but a downgrade by UBS which does not […]

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