Why have insiders been selling Netflix stock? And why is there such a large short position? Here’s a company that reported a revenue increase of 36% for 2005, a year-over-year gain of 69% in net income and an operating income jump – oops, make that a drop, from $19.3 million to $ 7.6 million.

Frank Gristina of Avondale Partners, a bull on the stock for much of last year, points out that the stock (NFLX $29) is selling at 63 times his estimate of this year’s earnings per share of $0.46. The stock is in a period of rapid growth, so many analysts are focused on next year’s earnings, which Mr. Gristina pegs at $0.98 a share.

Either way, it’s an expensive stock. It’s also a company that is navigating turbulent waters. Netflix is in the business of providing online movie rentals to subscribers. It has grown quickly in the past several years, and at year-end claimed 4.2 million subscribers, up from 2.6 million the year before. It appears that its model, which allows subscribers to order DVDs over the Internet and promises to deliver within one or two days, is rapidly taking market share from companies with an old-fashioned store-based approach, such as Blockbuster.

Why so many doubters? According to Mr. Gristina, who lowered his rating on the stock in October based on valuation, there is a high level of what he calls “headline risk” in the shares. By that he means that the company has so successfully developed the business that there is a concern others will enter the fray, or that other methods of delivering entertainment will arise.

There are, he says, more than 65 million households in America that rent videos. He imagines that more than half could shift to online renting, and he thinks that estimate is conservative. In other words, we are experiencing a great change in how DVDs are rented, and at the moment Netflix is just about the only game in town.

In the past couple of years Blockbuster and Wal-Mart have both taken a turn at carving out a piece of the business, but neither has had much success. More recently the bears have focused on Amazon, which has apparently made a stab at developing the business in Europe, but with such limited success that it has yet to make a serious assault on the market here.

More troubling to Mr. Gristina, though, is the rapid development of digital downloading. The concept of customers downloading video is quickly becoming a reality, thanks to companies like Google and Apple. As Mr. Gristina points out, successful downloading of music for iPods happened virtually overnight. The same thing could happen to video. At the recent Consumer Electronic Show in Las Vegas, the emphasis was on such portable deliveries; there is no doubt in any self-respecting techie’s mind that the future is something you can carry with you.

Mr. Gristina is also concerned that Steve Jobs’s involvement with both Apple and Disney augurs well for those companies’ ability to put the pieces together, and perhaps not so well for a company like Netflix.

However,these concerns are not likely to impact this year’s or next year’s results. Management is extremely bullish, forecasting that the company will have 20 million subscribers by 2010 or 2012, and will have 5.9 million by the end of this year.They are also forecasting revenues for the full year of at least $960 million, up from $688 million in the year just ended, and pretax income of $50 million to $60 million, up from $13 million.

With such bullish forecasts, it is surprising to see that a number of members of management (including the CEO and CFO) have sold stock in the past six months. Most of the sales appear to be part of programs, and probably have to do with some need for diversification. Also, the stock has bounced about pretty dramatically since a 2002 IPO (in the past 12 months alone the stock has sold as low as $9 and as high as $30), which could make even the most positive manager a little nervous. Still, the selling has been widespread and in total has amounted to better than 109,000 shares.

It is also curious that the short interest in the stock is almost 14 million shares, compared to a total 48 million outstanding – considered a high level. The short sellers have been active in the stock for some time.

One reason for the skepticism may be the erosion of margins last year, which is real evidence of competitive pressures. As Mr. Gristina says, “Management has acknowledged that it is in a race to add customers.” Winning that race may not be cheap, as was evident by the huge jump, to $47 million, from a year-earlier $29 million in fourthquarter marketing costs.

There is concern, too, that consumers will over time be content with the offerings on cable television, limiting demand for rentals.

Some analysts have also objected to the change in depreciation accounting adopted in 2004, which benefited income in that year by $10.9 million, on a base of $21.6 million.Instead of writing off DVDs over 18 months, in line with industry practices, the management adopted a 36-month schedule.

Notwithstanding the concerns, a number of observers consider Netflix an exciting growth stock. Dennis McAlpine of McAlpine & Associates, likes the stock, and has a price target of about $40. He points to the strong base being built by Netflix and the public’s underlying inertia and reluctance to change buying patterns. He has a good point. After all, the whole model assumes consumers can’t find the energy to go pick out their own videos and would rather pay to have them delivered to their door. Talk about inertia!

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