As I noted in the comments section of my initial reaction to the company's lackluster results, there's not much to say that I have not said before. I've said all I can say about the bearish implications of competition, rising content costs and international expansion in the articles I have written about Netflix for Seeking Alpha.
All I and everybody else can do now is watch the implosion play out. Or, if you've put your faith in Netflix CEO Reed Hastings, you can sit back and watch what could go down as the most amazing exhibition of quarter-to-quarter revenue growth in corporate history.
Hastings has set up a cut and dry scenario -- Q3 will not be so good, but, once the effects of our now-infamous price increase kick in, Q4 will be off the hook. The CEO is so certain that the seemingly abrupt shift in strategy will work and so positive that subscribers will flock to streaming and streaming/DVD combo plans in droves that he put himself out there in a way that will not only go down as pivotal, but takes a serious amount of guts.
Pay close attention to this excerpt from the above-linked Netflix Q2 letter to shareholders, signed by Hastings and CFO David Wells:
(Click to enlarge)
To throw out a number like a billion, even when qualified with "could," takes an incredible amount of confidence. I have to hand it to Hastings. If Netflix can hit this number, he looks like a genius, particularly if an EPS miss or drastically lowered EPS guidance does not accompany the result.
If, however, Netflix does not hit this number, or come at least incredibly close to it, Hastings has no place to run for cover. He put the number out there. I'm not sure if he thought through this bold action, but he basically did something beyond monumental here.
Reed Hastings put the Wall Street analysts and media pundits who love his company and his stock to death in a position where they have no choice but to finally hold Netflix accountable. How can they not? To throw out an actual number as psychologically symbolic as $1 billion sets the stage for accountability when Netflix reports its Q4 results.
There's no way out of this now. Either subscriber growth trends as expected and Netflix has a $1 billion fourth quarter (or close) or the company falls short. My guess is we will witness one of two extremes-- Hastings is remarkably on point or things go several thousand miles south of ugly. (Disclosure: I am long the latter).
Bookmark this article. Don't forget what should be the takeaway from Q2 that either puts Hastings in the CEO hall of fame or comes back to terrorize him. Come late January 2012, when Netflix releases its Q4 report and conducts its conference call, you'll have your answer to the question, Did Reed Hastings Make the Biggest Mistake of His Career in the Summer of 2011?