So, the bizarre Netflix (NASDAQ:NFLX) saga finally has come to a close. With yesterday's announcement of a $400 million equity raise Netflix management has entered the Capital Structure Hall of Shame. This is maybe the best example of the worst possible outcome for a CEO that has decided to play hedge fund manager.
Throughout the Netflix ordeal of the last year nothing confounded me more than their failure to issue equity and raise some serious cash as their stock entered the stratosphere. Every tick higher left me wondering when that inevitable announcement would come. Raise cash, lock up content for the long haul, and cement your position as cable/satellite's number one nemesis for years to come.
But the announcement never came, instead Netflix pulled a George Costanza and did the opposite of what every rational company would have done in their shoes. They took their precious cash and bought back stock. Now, six months later they are raising equity at 60% discount to those buybacks. That's just crazy. When do you ever see something like this and the management team gets to keep their jobs? And yet we have people still commending the Netflix management team, and criticizing the management of a company like Green Mountain Coffee (NASDAQ:GMCR).
I used to think Reed Hastings was a genius, and maybe he still is but this is still a very tough mistake to ignore. Meanwhile GMCR management seems to be making all the right strategic moves. Yes, the stock was preposterously overvalued, and yes the accounting issues are a major red flag, and yes the model is changing for the worse. But when it comes to GMCR, I can't really criticize management for the moves they are making. If your royalty model is going the way of the dinosaur when your patents expire, it makes sense to shift your focus to becoming the dominant global K-cup manufacturer. So, while I may have to question my long-term return prospects when I'm buying your shares at 80x earnings after you have overpaid to quickly consolidate your K-cup manufacturers; I can't fault you for making a necessary move. The same goes for when you raise equity to prepare for significant capex outlays down the road. These moves make strategic sense.
Meanwhile, everything Netflix did over the last eight months made no sense. Expand internationally before your streaming business in the US is even making any real money, sign short term deals, don't raise cash, and buy back stock. When viewed independently each decision can be questioned, put them all together and you have a disaster. When I want to buy and hold I try and avoid disasters even if i can see the potential opportunity down the road.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.