Is Netflix Beyond Reproach? TV Everywhere Doesn't Think So

|
 |  About: Netflix, Inc. (NFLX), Includes: T, TWX
by: SA Editor Rocco Pendola

I sent an email to Netflix (NASDAQ:NFLX) CEO Reed Hastings on Friday afternoon. While I never expected a response from Hastings himself, I sent the email for several reasons. I wanted to get Hastings' feelings on several issues, while personally submitting an interview request. I believe strongly that the media and analysts covering Netflix have shirked their responsibility to thoroughly cover the company. You cannot cherry pick what's important and what's not.

While the shareholder proposal I have written about, in and of itself, might not be epic news, the issue of how Netflix ultimately chooses to respond to it is. At this juncture, the Netflix board, as I understand the situation, can follow the will of the shareholders and move to adopt the proposal or elect to ignore it. How they decide to proceed can certainly tell us quite a bit about concerns over transparency and corporate governance and accountability - which the proposal aims to help address - inside the company.

I wanted Hastings to be aware of the fact that his IR department did not, up until today (literally, as I was writing the present article), issue a response to the repeated emails I have sent its way. He's a busy guy, therefore the chance exists that he does not know how they perform on behalf of the company between conference calls. After all, Netflix recently underwent a change atop its IR department so maybe it's experiencing growing pains.

I received the following response Monday from Netflix's IR department:

Click to enlarge
Click to enlarge
Not to be cynical, but I have been emailing IR daily for almost two weeks about this; they just so happened to get back to me the Monday after I emailed the CEO. I responded to this email with my thanks and a request for a definition of "due course." I did not ask for a definition of "consider," a word that floored me just a little.

I also believe Hastings should, for once, get asked actual difficult questions during an interview. I don't dislike the guy; in fact, I respect what he has done. That, however, does not give him a pass on issues such as his company's handling of the shareholder proposal and rising content acquisition costs.

I am inclined to say that Hastings often speaks out of both sides of his mouth, but I don't think that's the case. He's too smart of a guy to label in such a simplistic way. I think the problem is that, by design, he never has to give more color than he's comfortable with. For instance, consider these somewhat conflicting thoughts (or at least, thoughts I would have sought clarification on) he expressed during a recent interview with All Things D.

Click to enlarge
Click to enlarge
Click to enlarge

First, nobody that I know of, during or since that interview, has thought to ask Hastings how Time Warner (NYSE:TWX) "figure(ed) out social" so quickly with HBO Go. Beyond that, Hastings considers TV Everywhere Netflix's "main competition," but he's not keen on getting in the "new release business," which he predicts "will stay pay-per-view." I have no problem with that comment. I just want to know more. As an interviewer, the word "probe" should always be top of mind.

Assuming Hastings considers satellite providers like DirecTV (DTV) one and the same with cable, I would want to know what he thinks of this:

Click to enlarge
Click to enlarge

These DTV plans have been in the hopper for a while, but it appears they might finally be ready to hatch. AT&T (NYSE:T) is already on it via its U-Verse offering. It's literally impossible to keep up with the TV Everywhere initiatives. They're spreading like wildfire. For every one I write about, several others exist. And, literally, within hours of hitting submit on a Seeking Alpha article, I learn about another.

The logical question for Hastings, then, does Netflix really think it can survive as a purveyor of streaming reruns alongside TV Everywhere endeavors that provide non-pay-per-view new releases and, even more importantly, popular television shows the day after they air along with fresh news, sports and music? On one hand, Netflix posits itself as supplementary to the new release business; on the other, it says its primary challenge comes from outlets specializing in current material.

Is he drawing some distinction here between movies and TV shows? Does he see a scenario where Netflix could be boxed out? And, if so, like any good CEO, does he have a contingency plan in place? Are we seeing it with a renewed focus on DVDs, which represents an abrupt shift in strategy?

Rarely, if ever, do you see these questions (and others on content costs/the balance sheet and such) asked. They certainly do not get answered beyond a broad brush, if we even get that much. I would hate to think that the financial media thinks Netflix is beyond reproach. I would cringe even more if Netflix believes it is beyond reproach. This would be a bad move on the company's part because it's quite clear that satellite and other TV Everywhere movers don't share the same belief.

At this point, I proceed with caution with regard to any type of short on NFLX. Of course, it fell hard from its recent highs, but you never know when the momentum will reassert itself. That said, I think we see a further tempering of expectations on Netflix's July 18 conference call. After that, I expect earnings misses to start taking place (slowing subscriber growth, slow international growth, if any, and rising costs serving as the culprits). When that happens, the fall will be swift and hard (see Research in Motion (RIMM)).

I might play that sentiment by treading carefully into January 2012 and/or January 2013 NFLX puts with strikes in the neighborhood of $200 to $210. If you can find a way to hedge the position (e.g., putting on a put spread with lower strikes that you think will expire out-of-the-money), it might make sense, but I do not intend to hedge. Most importantly, have a risk management strategy.

The comments I receive on NFLX articles regarding losses incurred by shorting NFLX show a lack of trading and investing knowledge, quite frankly. To assume that anybody who has been short NFLX, via the stock or options, is getting killed is rudimentary at best. First, you can handle a short stock or long put position that's not going your way just as you can a long stock position - by averaging things out. Certainly, this is playing with fire, but if you handle the numbers properly and believe in your conviction it can work out in the end.

Better than that, though, don't stay in a position you cannot properly hedge only to suffer a catastrophic loss. Live to fight another day. Get out and take the inevitable small losses that come naturally with trading and investing. That's where stops and sound discipline merge. In fact, you should welcome the small losses. Accept them with a smile; because a history of small losses often means that you never got hit with the one that puts a lot of people out of business.

Disclosure: I have no positions in any stocks mentioned, but may initiate a short position in NFLX over the next 72 hours.