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FearNo1

I agree with the investor article that netflix stock is overvalued (hell so is the entire stock market itself...). While I think it may have been out of line for a CEO of a company to post on an investor site like that, it is good that hastings understands the huge challenges facing netflix and does not seem to be resting on his laurels. 2010 was a big year for netflix. It will be interesting to see what they will do in 2011.

Josh

The fact that a CEO would come out and cheerleader his own stock is immoral and boarder line illegal. This only goes to show that this stock is in major trouble and headed for a major downhill turn.

Racket

I would fully expect a CEO to cheerlead his stock, especially if he started the company. I don't know in what way it could be immoral or illegal.

Here is a contrarian take on all the Netflix shorts.

http://seekingalpha.com/article/242595-a-response-to-netflix-short-sellers

Tony

How is it illegal for a CEO to talk up his company's stock? Isn't that in part his job? Josh, you may indeed be mentally challenged.

Jolly

Agreed that when a CEO takes the time to address short sellers like this you have to wonder why. Either the other executives on the team are so capable that the CEO is not swamped with work (so can write such articles), or addressing short sellers is a "priority" for the CEO, which is certainly worrisome. The more a CEO is worried about market opinion and share price rather than managing the company, the more of a red flag it is generally.

Jolly

Another thing if he feels so strongly why is he himself selling stock and not buying it ask yourself that! http://moneycentral.msn.com/investor/invsub/insider/trans.asp?view=All&Symbol=NFLX

Nathan

Jolly,

The reason that Hastings is selling stock is because the majority of his compensation is in stock options. He only gets a small base salary. Also, Hastings has a regular stock sale set up whereby he sells a set amount of shares every week or month regardless of what the stock price is. This is typical of company insiders to ensure they do not sell on specific insider information.

Josh

While I think Netflix is a great company, I get very concerned when a CEO feels the need to respond to a one short seller. Usually when this happens, there is a lot of truth to the short seller's assertions.

Although it may not be smart to be short Netflix due to the rampant speculation and nose bleed valuations occuring with growth stocks today, I do agree with Whitney Tilson's main thesis that content costs are going up, way up.

Content is king and the controllers of that content will determine how it gets distributed and how it gets priced. To think that content providers are going to sell their product to Netflix at a lower cost than to cable and then watch Netflix's continued subscriber gains erode their revenue stream from cable is crazy.

As a result, the content providers are either not going to deal with Netflix altogether (like HBO), or they are going to charge a rate that is on par with their most lucrative customers (like EPIX).

As an example, when the STARZ deal renews, who do you think has all the leverage is those negotiations? Starz (and its partners Disney and Sony) is going to be very sensitive to selling Netflix their content if it means that there is going to be significantly less demand for its Starz and Encore cable channels. Now when Starz's contracts with Disney and Sony expire in 2015/16, the landscape could very well change, but it will be a result of what Sony and Disney (the content providers) ultimately decide.

To think that a company like Netflix has a durable competitive advantage in an industry where they do not control the content and they do not control the transmission lines for streaming video, to me, does not make any sense.

Some people could refute my argument here with an example like Amazon, but in Netflix's industry, the delivery of the product to the consumer (steaming video) is much simpler (than setting up distribution centers all over the place) and the product providers are a lot less fragmented (there are about 8 major content providers vs. thousands of suppliers to Amazon).

Content is king here. As a result, Netflix will either have to pay up or get passed by. If they pay up, margins will get squezzed. If they don't, subscriber growth will slow dramatically and possibly decline. If either of these things happens, NFLX stock will be headed for a big fall.

Marc

Personally, I don't have a position in NFLX stock and don't care which way it goes except insofar as this bull-versus-bear debate makes for a nice spectator sport (hence my reason for reading the Tilson article and this one)..

But I have to say I'm very deeply troubled by this particular piece.

I've been an analyst since 1980 and over the years have had countless conversations with executives -- one on one, in meetings and on conference calls -- and have never seen any executive, much less a CEO, come straight out and issue a specific recommendation for his/her company's stock. Generally, it is presumed management is bullish. The typical course if for the executive to explain the company's business, discuss its opportunities, and address the risks but at the end of the day, keep hands off when it comes to saying "buy" (or "cover the short") with respect to the stock.

That could easily have been done here with some modest editing. I presume Mr. Hastings vetted this with Netflix legal and I'm a bit surprised they didn't edit or if they did, I'd be surprised Hastings rejected the edits. All that needed to be done would have been to delete the cutesy language wherein Hastings encourages his good buddy Tilson to cover the short.

Yes, I know there's a safe harbor disclaimer at the bottom. Perhaps the lawyers said that was enough. In a strict black-and-white sense, it is. But while the law may not have been violated here, good sense and executive etiquette were definitely trampled, and if corporate lawyers and executives are going to take the position that pasting in some mandatory legal boilerplate is sufficient to allow CEOs to do cheerlead for their stocks, that would be sad. I'm sure the lawyers who allowed this to go through are familiar with the phrase "slippery slope." I think Hasting just delivered an important kick to start this aspect of securities law moving down the first part of the hill.

And by the way, from my own experience, the few CEOs i did encounter over the years who did edge close to the line of accpetable comemenatary (albeit none nearly as close as Hastings in this case) . . . well, let me just say owning a portfolio of those stocks would not have turned out to have been wise.

Reed, judging by your photo, you're obviously young by CEO standards, quite young. Please chalk this thing up to youthful error and don't repeat. Again, you should talk about and even advocate for your company. Just stop giving advice on NFLX stock. when you get into habit of standing so close to the edge of legality, sooner or later you run the risk of losing your balance and falling over in the wrong direction.

jolly

Tony Nathen Racket ... to answer your question.....He could stop the biweekly sales program at the flick of a switch .I presume Steve Jobs, is not hedging his execution at Apple with stock sales. Cognitive dissonance or plausible deniability should not excuse the stock sales . If Reed is defensive, maybe we should be too. Believe me, I need the money more than he does.

jolly

Netflix (Nasdaq: NFLX) CEO Reed Hastings' strange move today to address short seller Whitney Tilson is creating quite a buzz on Wall Street today.

While Whitney Tilson was unavailable to comment on Hastings' letter, another noted short seller, Manuel Asensio, had some harsh things to say about the matter.

Asensio told StreetInsider.com "I find it extremely irregular and disrespectful."

He calls the letter from Hastings, "reflective of the poor and questionable disclose which has led to the informational insensitivity of the stock."

Asensio describes informational insensitive stocks as those that don't respond to prevailing Wall Street opinion. In the case of Netflix, the prevailing logic is that the stock is overvalued, yet the stock does not respond to this wisdom and keeps going higher. Even CEO Hastings himself described the valuation of the stock in his letter today as "substantial."

Mr. Asensio called it the responsibility of the Board of Directors to monitor Mr. Hastings irresponsible actions in this matter and in others. He said Mr. Hastings' wording in the response was custom tailored to create a short squeeze in the stock.

Mr. Asensio reiterated his view, expressed in a recent CNBC appearance, that the company can never make the fictitious Wall Street estimates. He also promised to become much more involved in the stock.

Shares of Netflix are down 1.3 percent today to $177.67.

ritch

Whitney, even a broken clock is right twice a day.

jolly

Maybe this will help
We depend on studios and distributors to license us content that we can stream instantly over the Internet.

Streaming content over the Internet involves the licensing of rights which are separate from and independent of the rights we acquire when obtaining DVD content. Our ability to provide our subscribers with content they can watch instantly therefore depends on studios and distributors licensing us content specifically for Internet delivery. The license periods and the terms and conditions of such licenses vary. If the studios and distributors change their terms and conditions or are no longer willing or able to provide us licenses, our ability to stream content to our subscribers will be adversely affected. Unlike DVD, streaming content is not subject to the First Sale Doctrine. As such, we are completely dependent on the studio or distributor providing us licenses in order to access and stream content. Many of the licenses provide for the studios or distributor to withdraw content from our service relatively quickly. Because of these provisions as well as other actions we may take, content available through our service can be withdrawn on short notice. For example, in December 2008, certain content associated with our license from the Starz Play service was withdrawn on short notice. In addition, the studios have great flexibility in licensing content. They may elect to license content exclusively to a particular provider or otherwise limit the types of services that can deliver streaming content. For example, HBO licenses content from studios like Warner Bros. and the license provides HBO with the exclusive right to such content against other subscription services, including Netflix. As such, Netflix cannot license certain Warner Bros. content for delivery to its subscribers while Warner Bros. may nonetheless license the same content to transactional VOD providers. If we are unable to secure and maintain rights to streaming content or if we cannot otherwise obtain such content upon terms that are acceptable to us, our ability to stream movies and TV episodes to our subscribers will be adversely impacted, and our subscriber acquisition and retention could also be adversely impacted. During the course of our license relationship, various contract administration issues can arise. To the extent that we are unable to resolve any of these issues in an amicable manner, our relationship with the studios and distributors or our access to content may be adversely impacted. "
This is from the companys 10-K report
My regards,

Racket

This may help in what way? Netflix pays the studios in the same way that HBO or CBS does. For the most part, he who brings the most money wins. Netflix has built the bulk of their 20,000 instant watch titles on older content that the studios are just happy to make a buck on. Even good old Jeff Bewkes personally sold netflix the streaming rights for Nip/Tuck and he did so because there was no one else who would pay for syndication.

The real question is how much can Netflix grow. HBO maxed out at ~30 million subscribers several years ago and has been slowly shedding them ever since. Is 30 million the magic number? What happens if we add Canada? UK? Korea? India? CHINA! Last I heard there are people in Europe and Asia that have internet access.

BP

@ Racket

Much like the female orgasm, Racket, the idea of people in Europe and Asia having internet access is nothing more than a myth.

-BP

Edward R Murrow

I believe that what Josh is referring to, is that Reed Hastings may have just made Forward Looking Statements outside of the Application of the Safe Harbor section of the Security Exchange Act.

BTW, based on some of the conversations here, I shorted Netflix when the stock was at $208. I want to thank everyone on this blog for convincing me that shorting is a good thing to do 'cause I made a bundle shorting Netflix. What a Christmas it's going to be!

iphone 4 white

This is a really good read for me, Must admit that you are one of the best bloggers I ever saw,but not knowing how or where, is something a lot of us are going through. As our company is based in the US, it?s all a bit new to us.

English Professor

You speak good English iphone 4 white

Hedge3

Suggest those who don't know much about Reed Hastings learn more about him. Hastings is an absolutely wonderful human being who people love. Just in the past couple months Hastings was named lead outside director on Microsoft's board of directors, shared the stage with Steve Jobs during Apple iPhone 4's debut, attracted Google board member Ann Mathers to Netflix's board of directors, and was named Fortune magazine's Businessman of the Year.

BigFish

Cramer 12/20/10 bullish on Netflix: http://www.cnbc.com/id/40752228

Aside of the fact that Netflix down $31 is no longer “priced to perfection,” as the bears would say, Cramer said they’re missing the big picture. Netflix is a play on the tectonic shift to online video streaming from DVDs, and the company brings this ever-more-popular technology to consumers through Apple’s iPad, iPhone and iPod Touch, through Sony’s PlayStation 3 or Microsoft’s Xbox or Nintendo Wii or through any other device that connect the television to the Web. None of the company’s so-called competitors has this kind of reach.

Consumers get this, which is why Netflix is on track to book about 20 million subscribers by the end of the year. The subscriber base grew by 52 percent year-over-year in the most recent quarter, and there’s the potential for another 40-percent worth’s of growth in 2011. And that’s just in the U.S. and Canada. Goldman Sachs estimates that Netflix could have 15 million international subscribers by 2015 as the streaming service is launched in other countries. Cramer thinks the company could hit that mark even sooner. Not to mention, none of this growth is in the numbers yet, meaning estimates raises that will push the stock higher are most likely on their way. Those overseas launches should catalyze the stock, too.

As for NFLX’s valuation, the stock trades at 47 times 2011 earnings and has a 29-percent long-term growth rate. That number drops to 33 times earnings when you look at 2012, which is cheap. Keep in mind also that money managers would be willing to pay up to twice the growth rate for a momentum name like this, and Netflix isn’t trading anywhere near that high. So there’s virtually no way anyone can say this stock is overvalued.

A final, quick comparison to put this in perspective: Goldman thinks Netflix is on track to serve 50 million subscribers—15 million overseas and 35 million in the U.S., with the latter number being equal to 40-percent of all broadband households. But still the company’s market cap is just $9.3 billion, a figure too small to contain this brand, Cramer said. Will Netflix then be the next Amazon.com, which almost doubled its market cap between 1998 and 1999 to $32.2 billion from $16.8 billion and now boasts a market cap of $80 billion?

“I don’t know,” Cramer said, “but it could sure be the next Amazon of a decade ago, which would mean a market cap about 80 percent larger than it is now.”

Cramer therefore is once again bullish on NFLX, especially down at these levels. He recommended that viewers start to buy the stock. One of the best ways to do so, he said, is with deep-in-the-money call options.

jolly

Yeah of those twenty Million how many are free subscribers? Hastings has never addressed this?

Glenn

@BP

Having been in South Korea, Japan and Germany many times in the past several years I can attest to the fact that Asians and Europeans do have internet access and in most cases at much faster speeds for lower prices than we in the U.S.

Also, did you ever think maybe it's just that YOU have no clue HOW to give a female an orgasm?

jollly

The draft is all about protecting an "open" internet. It forbids internet service providers, such as Comcast or Time Warner, from throttling (slowing) legal traffic. It also would likely outlaw plans, such as the pay-per-site scheme unveiled by wireless providers this week.

The rules have a number of exceptions, though. Wireless carriers are allowed to throttle certain kinds of traffic (e.g. video), assuming they are not using that as a tool to promote their services in an anticompetitive fashion (i.e. the proposal permits them to "reasonably" manage traffic). And while they may have to prove it's illegal, wired and wireless operators are allowed to throttle illicit traffic, such as P2P or bittorrent traffic of pirated materials.

Those limitations may bother some net neutrality advocates. The mobile provision is particularly worrisome to companies like Google who are becoming increasingly reliant on mobile advertising and peddle a variety of high-bandwidth products (like YouTube).

While the outlook is good for video and voice services (e.g. Skype, YouTube, and Hulu) in the wired domain, trouble could show its face their as well. The proposal permits wired carriers to adopt usage-based pricing, as many are eager to do.

Usage-based pricing is a mixed bag for the public. For "low tech" internet users, who only check their email and read text-heavy pages like Wikipedia or The New York Times, their bills will likely be reduced. But for "high-tech" users who video chat on Skype, stream movies from Netflix, or play online games they may soon see their bills skyrocket.

The FCC promises to monitor the markets for what it sees as abuses. But the question is whether the Commission will act in time to prevent such abuses before they happen and whether its rulings will even hold up in court, given the fact that they're loosely defined in existing and pending regulation guidelines

BP

@ Glenn

I bet you're real fun at a party, aren't you?

-BP

jolly

That and I could buy and sell you because your just a little toad.

Jack

Jolly,

Free subscribers would turn up in the churn rates as subscribers who don't renew.

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