Netflix: 3 Different Insiders Have Sold Shares This Year

Jan.30.14 | About: Netflix, Inc. (NFLX)

In this article, I will feature one services sector stock that has seen intensive insider selling during the last 30 days. Intensive insider selling can be defined by the following three criteria:

  1. The stock was sold by three or more insiders within one month.
  2. The stock was not purchased by any insiders in the month of intensive selling.
  3. At least two sellers decreased their holdings by more than 10%.

Netflix (NASDAQ:NFLX) provides Internet television network service that enables subscribers to stream TV shows and movies directly on TVs, computers, and mobile devices in the United States and internationally.

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Insider selling during the last 30 days

Here is a table of Netflix' insider-trading activity during the last 30 days by insider.

Name Title Trade Date Shares Sold Rule 10b5-1 Current Ownership Decrease In Ownership
Timothy Haley Director Jan 24 13,717 Yes 0 shares + 322 options 97.7%
Leslie Kilgore Director Jan 23 5,929 Yes 13,028 shares 31.3%
Neil Hunt CPO Jan 2 5,000 Yes 80,786 shares + 9,079 options 5.6%
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There have been 24,646 shares sold by insiders during the last 30 days. All these shares were sold pursuant to a Rule 10b5-1 plan.

SEC Rule 10b5-1 is a regulation enacted by the United States Securities and Exchange Commission (SEC) in 2000. The SEC states that Rule 10b5-1 was enacted in order to resolve an unsettled issue over the definition of insider trading, which is prohibited by SEC Rule 10b-5. After Rule 10b5-1 was enacted, the SEC staff publicly took the position that canceling a planned trade made under the safe harbor does not constitute insider trading, even if the person was aware of the inside information when canceling the trade. This staff interpretation raises the possibility that executives can exploit this safe harbor by entering into 10b5-1 trading plans before they have inside information while retaining the option to later cancel those plans based on inside information.

For example, a CEO of a company could call a broker on January 1 and enter into a plan to sell a particular quantity of shares of his company's stock on March 1, find out terrible news about his company on February 1 that will not become public until April 1, and then go forward with the March 1 sale anyway, saving himself from losing money when the bad news becomes public. Under the terms of Rule 10b5-1(b) this is insider trading because the CEO "was aware" of the inside information when he made the trade. But he can assert an affirmative defense under Rule 10b5-1(c), because he planned the trade before he learned the inside information.

In general, it is a safer way for an insider to sell shares pursuant to a Rule 10b5-1 trading plan than without it.

Insider selling by calendar month

Here is a table of Netflix' insider-trading activity by calendar month.

Month Insider selling / shares Insider buying / shares
January 2014 24,646 0
December 2013 22,449 0
November 2013 41,020 0
October 2013 401,947 0
September 2013 30,434 0
August 2013 36,235 0
July 2013 52,426 0
June 2013 15,988 0
May 2013 152,985 0
April 2013 512,814 0
March 2013 750 0
February 2013 1,604 0
January 2013 398,971 0
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There have been 1,692,269 shares sold, and there have been zero shares purchased by insiders since January 2013.

Financials

Netflix reported the full-year 2013 financial results on January 22 with the following highlights:

Revenue $4.4 billion
Net income $112.4 million
Cash $1.2 billion
Debt $500.0 million
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Outlook

Netflix expects to end the first quarter with 48 million members.

(Source: Earnings letter)

Competition

Netflix' competitors include Amazon.com (NASDAQ:AMZN), Time Warner (NYSE:TWX), and Google (NASDAQ:GOOG). Here is a table comparing these companies.

Company NFLX AMZN TWX GOOG
Market Cap: 24.25B 180.54B 57.12B 375.18B
Employees: N/A 88,400 34,000 46,421
Qtrly Rev Growth (yoy): 0.24 0.24 0.00 0.12
Revenue: 4.37B 70.13B 29.39B 57.39B
Gross Margin: 0.30 0.27 0.46 0.57
EBITDA: 276.72M 3.17B 7.93B 17.60B
Operating Margin: 0.05 0.01 0.24 0.24
Net Income: 112.40M 132.00M 3.76B 11.74B
EPS: 1.85 0.28 4.11 36.75
P/E: 219.88 1,429.09 15.38 30.56
PEG (5 yr expected): 4.43 14.31 1.35 1.61
P/S: 5.19 2.52 1.94 6.41
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Netflix has the second-highest P/S ratio among these four companies.

Here is a table of these competitors' insider-trading activities during the last 12 months.

Company Insider buying / shares Insider selling / shares
AMZN 0 2,436,926
TWX

7,800

1,608,219
GOOG 0 4,490,666
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Only Netflix has seen intensive insider selling during the last 30 days.

Conclusion

There have been three different insiders selling Netflix, and there have not been any insiders buying Netflix during the last 30 days. Two of these three insiders decreased their holdings by more than 10%.

There are eight analyst buy ratings, 25 neutral ratings, and six sell ratings with an average price target of $369.46. Before going short Netflix, I would like to get a bearish confirmation from the Point and Figure chart. The two main reasons for the proposed short entry are bearish analyst price targets, and the intensive insider-selling activity.

Disclosure: I am short AMZN. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.