Is This Netflix Exec Getting Out On Top?

It always turns heads when a CFO leaves a company, so Netflix (Nasdaq: NFLX  ) had to know that last night's announcement that CFO Barry McCarthy would be leaving wouldn't go over too well with investors.

It also doesn't help that McCarthy exercised a ton of stock options last month, selling more than $40 million worth of Netflix stock along the way.

As the chief bean-counter at Netflix, does his departure hint at the mother of all accounting scandals? No. Grow up. Executives leave all the time. However, McCarthy is leaving just as the stock is hitting all-time highs. Netflix's stock has more than tripled this year alone.

In other words, he's picking an opportune time to cash out as he seeks a change of scenery.

Jefferies & Co. analyst Youssef Squali thinks shareholders may want to follow suit. Squali downgraded Netflix stock from buy to hold after the company announced McCarthy's departure.

McCarthy wasn't just some mercenary executive. He's been with the company since its early years, and proved instrumental in taking the company public eight years ago. The press release claims he's off to pursue "broader executive opportunities;" he clears out his desk Friday.

These are interesting times for Netflix. The company has grown quickly. It now watches over 16.9 million subscribers, trailing only Comcast (Nasdaq: CMCSA  ) , Sirius XM Radio (Nasdaq: SIRI  ) , and DIRECTV (NYSE: DTV  ) in premium entertainment subscribers. By this point next year, I wouldn't be surprised to see it leading all three.

However, the competition is finally starting to smarten up. As I pointed out yesterday, Apple and Amazon.com are beginning to take digital video seriously.

Apple is trying to woo customers by sending out online coupons for free iTunes movie rentals to select accounts this week. Amazon.com is reportedly working on a streaming service that it will bundle with its loyalty shopping program. Studios are also starting to bellyache over Netflix's growing power.

Maybe McCarthy sees that the competitive landscape is changing. The more likely scenario, though, is that he also realizes that his stock as a key executive is also at an all-time high, after helping to guide Netflix through years of market-thumping performance. If he wants to be a CEO elsewhere -- an opportunity he will never get at Netflix, unless Wall Street fave Reed Hastings decides to make the leap into politics -- why not strike while the iron is hot?

McCarthy's move makes perfect sense -- but the market's disappointment today is equally understandable.

Which rival offering makes Netflix the most vulnerable? Share your thoughts in the comment box below.

Apple, Amazon.com, and Netflix are Motley Fool Stock Advisor recommendations. The Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Longtime Fool contributor Rick Munarriz has been a Netflix shareholder -- and subscriber -- since 2002. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.


Read/Post Comments (6) | Recommend This Article (11)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 08, 2010, at 10:45 AM, JamesRobertDobbs wrote:

    "By this point next year, it wouldn't be a surprise to see it ahead of all three."

    Why? What is your reasoning here ... based on growth up to this point? The upcoming year brings all sorts of unknowns from the other three.

  • Report this Comment On December 08, 2010, at 11:05 AM, BioBat wrote:

    JamersRobertDobbs,

    It's an opinion stated by the author and one that I'm inclined to agree with. They were at 16.9m subs at the end of last quarter and projected to hit nearly 20m by the end of the year. Sirus has 20m and Comcast has 22m. While they're ahead, Comcast is contracting and Sirus is leveling off while Netflix is still in hypergrowth largely due to the company placing itself onto every device (TV connected and otherwise) imaginable. There are many millions of iPhones, iPads, and internet enabled TVs that will be gobbled up over the holidays and many of those will turn into new Netflix subs.

  • Report this Comment On December 08, 2010, at 12:29 PM, HectorLemans wrote:

    I bought one $200 put option on Netflix when the share price was above $208. With any luck, I'll re-coup some money I could of had if I hadn't of sold all my shares at $120 :-( If not, oh well...it's just one option.

  • Report this Comment On December 08, 2010, at 1:57 PM, naandrews wrote:

    Rick,

    Thanks for a calm, even-handed article that eschews what all the short-sellers are screaming -- "Netflix is going down because the CFO is leaving" -- in favor of a more reasoned discussion.

    You never want to see a CFO leave (unless he/she worked for Enron, perhaps), but it's not necessarily a terrible thing.

    Plus, good news from ABC/Disney today; I'd argue that's the bigger Netflix news today.

    Neil (long NFLX)

  • Report this Comment On December 08, 2010, at 9:20 PM, Latoile wrote:

    This stock worries me. It always has. CFO's don't just sell all they're shares and leave, especially if the company is on the cusp of a big breakthrough.

  • Report this Comment On December 09, 2010, at 12:28 PM, thejatrain wrote:

    What about Blockbuster? I note their $4B in revenue is more than twice that of Netflix's $1.6B (per google finance). Is the streaming model so difficult to copy? Check this out: http://www.blockbuster.com/download/devices

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