The real failure at Netflix
- September 20th, 2011
Netflix ($NFLX) has come under a great deal of criticism for the decision to split its business into separate streaming and DVD-by-mail companies. Nearly everyone agrees that the DVD business is in terminal decline. The only question is how fast will that business get displaced by streaming. However the manner in which the company has done the split has prompted some customers like Lew Harris at The Wrap to give up their subscriptions.
The bigger question for Netflix the company is why was it buying back shares throughout the stock’s run up? The chart below shows that Netflix has been buying a relatively consistent share repurchaser including in 2011.
Rather than buying back shares throughout 2011 the company would have been better served issuing shares so as to better fund the transition from DVD to streaming. Herb Greenberg at CNBC made this point earlier in the year. Losing content from the likes of Sony and Starz has only served to convince some that the Netflix streaming model is flawed.
In short it looks like Netflix management began to believe their own hype as the stock ran from $50 to nearly $300. The fact that Reed Hastings took the step to respond publicly to Whitney Tilson’s short case against Netflix now seems like misplaced effort. Rather than worrying about the stock price they should have been more worried about their financial position and their business model.
*No position in NFLX. Long time customer.
Whitney Tilson’s short case against Netflix. (Seeking Alpha)
Reed Hasting’s response to Tilson. (Seeking Alpha)
Abnormal Returns is a participant in the Amazon Services LLC Associates Program, an affiliate advertising program designed to provide a means for sites to earn advertising fees by advertising and linking to Amazon.com. If you click on my Amazon.com links and buy anything, even something other than the product advertised, I earn a small commission, yet you don't pay any extra. Thank you for your support.
The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.
Abnormal Returns has over its seven-year life become a fixture in the financial blogosphere. Over thousands of posts we have striven to bring the best of the financial blogosphere to readers. In that time the idea of a “forecast-free investment blog” remains as useful as it did six years ago. More »
- Podcast Friday: growing ambitions
- Tuesday links: investing jargon
- Monday links: valuation estimates
- Sunday links: slow money
- Top clicks this week on Abnormal Returns
- Saturday links: unavoidable risks
- Friday links: stark-raving lunacy
- Podcast Friday: feeling fresh
- Thursday links: a potentially false doctrine
- A perfect example of the behavior gap at work