Occam’s Razor on Netflix and its CEO

Few days ago, Reed Hastings posted his views at Alphaville website responding directly to the most famous NFLX short seller and the official Grinch for 2010 Christmas, Whitney Tilson. The skeptics ripped Mr. Hastings apart for writing on a blog site largely meant for traders, and being so overly concerned about the stock prices. They said it was not a respectable and good use of a CEO’s time. The supporters on the other hand hailed it as a refreshing and honest move on part of a company’s CEO who had to come out and say something. The loyalists also defended him by saying he was after all talking about his company in as strategic manner as possible.

It is true that Reed did try to explain his company’s strategy and address fears of direct competition to a certain extent. But let me not mince any words and take off the masks of cult believers by saying that at the end of the day he was most certainly worried about the company’s stock price. And yet, I think it was a brilliant move for a very simple reason that was surprisingly not covered much by either skeptics or supporters.

The biggest thing Netflix now needs is infusion of fresh capital. And it seems to be chiefly so for three reasons – (1) International expansion, (2) More content acquisition, and (2) Fend off competition by maintaining its razor sharp focus on what it does best – content streaming subscription and user experience.

Where do you think Netflix is going to get its infusion from? Yes genius, from its very own stock price. If Netflix was to make a secondary offering, would it help if its stock price was already tanking to the south of $150? Heck no. When the secondary offering itself most often dilutes the price of a stock, it is obviously helpful for a company to do one when its stock is at a peak and not tanking downwards.

So I submit that Reed Hastings’ primary reason to write was to defend the stock price of the company and that in turn may have largely to do with a possible capital raising venture next year. Of course it did serve the secondary purpose of defending the company on strategic terms.

As a side note, when you have two executives coming out in a short interval of 2 weeks or so warning not to short the stock, you have to pay heed. Even if it is out of desperation, here is the thing about Silicon Valley. Unlike Wall Street, Silicon Valley execs rarely stick their neck so far out unless they are incredibly confident of what they are asserting. These execs have their integrity and reputation at stake here. And nothing can be riskier in Silicon Valley.

Current Strategy on NFLX

Long time readers know I have been long NFLX since $153. Right now valuations are lofty. But the huge short float provides a major floor to the stock price. Until the short ratio dips, I will continue to remain long. I will sell or go short when the short float becomes shallower. I will go back long NFLX after the stock dilutes in case of a secondary offering or a major sell off.

In other words, strategy now is Short term Bullish (2-3 weeks), Intermediate term Bearish (3-8 weeks), Long term Bullish (8+ weeks). Things can change and so will I and so will my posts and twitters.

Merry Christmas,

StocksRider

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