IN AN unusual move for a public company chief executive, Netflix Inc. (NASDAQ:NFLX) CEO Reed Hastings has responded via a blog post on the popular Seeking Alpha website to an investor who is shorting his company’s stock.
Hastings, 50, was reacting to a lengthy post on Seeking Alpha by Whitney Tilson, founder and managing partner of T2 Partners LLC, who outlined the reasons why his company is short Netflix, a $9.4 billion market-cap company that provides online movie services in the United States and Canada.
This is believed to be the first time that a CEO of Hastings’ profile has responded directly to an investor in a public blog post. Seeking Alpha attracts more than 3 million monthly readers.
Tilson documents concerns
In his December 16 post, T2 Partners’ Tilson laid out in a 7,000-word investment thesis why he thinks Netflix is overvalued, admitting that his firm has “lost a lot of money betting against Netflix, which is currently our largest bearish bet, in the form of both a short and put position.”
He cited shrinking future margins due to higher content costs and future amortization expenses, a lack of new customers to fuel the company’s growth, higher bandwidth costs, legal risks to the business model, and the resignation of CFO Barry McCarthy earlier this month.
Tilson concluded saying that the company is “already having to pay much more for streaming content and may soon have to pay for bandwidth usage as well, which will result in both margin compression (Netflix’s margins are currently double Amazon’s) and also increased prices to its customers, which will slow growth.
“Under this scenario, Netflix will continue to be a profitable and growing company, but not nearly profitable and rapidly growing enough to justify today’s stock price, which is why we believe it will fall dramatically over the next year.”
CEO responds in frank post
In his 2,200-word reply today, which comes with the obligatory forward-looking statement disclaimer, Netflix’s Hastings expresses admiration for Tilson, calling him “a great investor and a wonderful human being” who shares a common philanthropic interest in donating to charter schools.
“At Netflix we mostly focus on building our business and letting the numbers do the talking,” Hastings writes. “But Whitney is such a big-hearted donor to causes that I care about that I am writing this open letter for him to try to get him to cover his short now. My desire is to increase his odds of making money next year so he can donate even more to the charter public schools that we both think are important to our country’s future.”
He then goes on to address each of Tilson’s arguments, explaining why CFO McCarthy left (he’s older than Hastings and wants to be a CEO) and addressing the various threats to Netflix’s business. The response is remarkably balanced and frank.
In the conclusion he writes: “To wrap up, I have to agree with my friend Whitney that there are many risks ahead for Netflix, that our valuation is substantial, and that it is possible that one could make money shorting Netflix today. But shorting a market leading firm as it is driving a huge new market is a very gutsy call. On balance, I would rather have my co-philanthropists on the long side of this particular bet.”
As one investor commenting on Hastings’ post says: “Never thought I would hear a CEO say that [valuation is substantial], but his honesty is admirable and reflects well on management and the company. Content costs and competition do seem like a real threat that may not be reflected in today’s stock price.”
One problem I have with how this was handled is that Netflix’s IR website makes no mention of the post at the time I’m publishing this post. The company’s Twitter account also does not mention it, and there’s nothing on EDGAR.
When a CEO gets into as much detail as Hastings does in his post on Seeking Alpha, it’s news — even if there’s no new material information in what he’s saying. At minimum, a link to the post should be posted on the company’s IR homepage, and preferably blasted out via the IR site’s email list and RSS feed.