Seemingly tired of hearing that shares of video-on-demand market leader Netflix are wildly overvalued, chief executive Reed Hastings on Monday publicly took on investors and pundits "shorting" his company's stock. Hastings wrote a column appearing on investor website Seeking Alpha in which he challenged arguments previously made on the site by investor Whitney Tilson supporting his decision to "short" shares of Netflix. (Also see: Resentment of Netflix by carriers, media companies grows)
Shorting is the process by which investors bet that a company's share will fall. If the investor places a "short" bet on a stock whose price subsequently drops, the shorting investor makes money. Many investors, Tilson among them, believe Netflix shares are overvalued. NFLX shares hit an all-time high of 209.24 on Dec. 1. From that recent high point through Monday's closing price of 178.05, Netflix shares are down 15 percent. But even with the recent slide, Netflix shares are worth six times what they were two years ago. Getting back to Hastings. After lavishing praise on Tilson as a "great investor and a wonderful human being," the Netflix CEO writes: "Whitney lays out a series of potential issues for us: Our CFO’s recent resignation; threats to the First Sale doctrine for DVDs; internet bandwidth costs potentially increasing; declining FCF conversion; market saturation; weak streaming content; paying more for streaming content; and increased competition hurting margins. He only has to be right on one or two of these issues in 2011 for him to make money on his short of Netflix." Then Hastings confidently declares the "odds are (Tilson) is wrong on all of them." (Which makes you wonder if Hastings thinks "wonderful human being" Whitney Tilson actually is a "great investor" or is just being polite. Or, most likely, merely doing his job as CEO defending his company while trying not to come off as hostile and defensive.) Hastings then makes a detailed case against each item on Tilson's "Why I'm Shorting Netflix" checklist, and even throws in a freebie Netflix concern not mentioned by Tilson, bringing some value-add into the fray. Hastings then concludes: "I have to agree with my friend Whitney that there are many risks ahead for Netflix, that our valuation is substantial, and that it is possible that one could make money shorting Netflix today. But shorting a market leading firm as it is driving a huge new market is a very gutsy call. On balance, I would rather have my co-philanthropists on the long side of this particular bet." Hastings signs off, "Respectfully, your ally and admirer." He makes it all seem so civil.
Chris Nerney writes about the business side of technology market strategies and trends, legal issues, leadership changes, mergers, venture capital, IPOs and technology stocks. Follow him on Twitter @ChrisNerney.