Netflix: Money to Burn

"It's always nice to have more money than you need," Netflix (Nasdaq: NFLX  ) spokesman Steve Swasey said Monday after the company announced it was selling $200 million of common stock to a mutual fund company for $70 apiece.

How nice that mentality would have been earlier this year. Netflix spent $199.6 million repurchasing its stock in the first three quarters for an average price of $221.9 per share. Now that shares have plummeted and its cash needs are ramping up, it's selling those shares back to the market for a fraction of what it paid for them.

Companies have a poor track record of managing share buybacks, but this might be the most egregious example of wasting shareholder money in recent times. By selling $200 million worth of shares for 70% less than it paid for them just months ago, Netflix effectively flushed $140 million of shareholder wealth down the drain in nine months flat. That's the equivalent of losing 1.3 million subscribers for a year.                                                              

Netflix has a history of questionable buybacks. As The Wall Street Journal notes, "Between the start of 2007 and June 30 of this year, Netflix generated $507 million in free cash flow. Yet, over that same period ... it spent $994 million buying back shares." It did so in part by issuing debt.

This is virtually unheard of for young technology companies. Google (Nasdaq: GOOG  ) , for example, has spent an insignificant amount of money on buybacks since going public, despite earning tens of billions in profit. Apple (Nasdaq: AAPL  ) , while not young, hasn't repurchased a single dollar of its stock in almost a decade, despite being one of the most profitable companies in the world.

There are two reasons why, both of which Netflix can learn from.

Young companies, particularly in the technology field, need buckets of cash to guard against encroaching competition and a fickle economy. Years ago, Bill Gates noted that he always wanted enough cash in the bank to cover Microsoft's (Nasdaq: MSFT  ) expenses for one year without any revenue. He elaborated last week during the company's annual meeting:

You want to retain enough so that the company has the strength to be able to take big risks, even in the face of some economic uncertainty. So, I've always been a big believer in having a very strong balance sheet for the company.

It's been interesting, traditionally technology companies did not do that, but I'd say over the last five years, the Microsoft approach on that has become more typical, some having balance sheet[s] in some numeric respects with even more cash on them than we have.

This isn't to say one should hoard. A rapidly growing company like Netflix can put cash to work expanding operations. On a shareholder conference call this summer, one analyst asked Netflix CFO David Wells a simple question:

Given your relatively modest cash position relative to the size of checks you're writing for content, and the success you're having with that content investment, what is the rationale of buying back stock? Given the multiple you get for subs, won't you generate more value by investing and adding subs versus buybacks?

By any reasonable standard, the correct answer was: yes. Netflix generates more value investing in its business than it does repurchasing its shares. Instead, Wells rambled somewhat nonsensically, and then replied:

I'd say how we approach the buyback is, what could we do with that cash as an alternative use? Should we hold it as an insurance policy or should we return it to shareholders? And a buyback is the most efficient way to do that.

In hindsight, holding cash as an insurance policy was clearly the better option. But to Wells' point, are buybacks the most efficient way to return cash to shareholders? Several studies show that, on average, they unequivocally are not. According to The New York Times, over the last decade, "companies that spent the most on repurchases had a total shareholder return of 37 percent versus 127 percent for companies that spent the least."

The reason why is simple, as Netflix has demonstrated so clearly: Most CEOs are terrible stock market investors, buying high and selling low. As markets peaked in 2007, S&P 500 buybacks hit $589 billion. In 2009, when markets were as cheap as they'd been in years, they plunged to $138 billion.

This isn't surprising -- investing isn't most CEOs' specialties. Nor should it be. There is no reason to expect someone who is a genius at creating a digital media company to also be a genius at purchasing stock at the right price.

But that is no excuse for wasting money. It is a company's duty to stick to what it knows. Netflix is fantastic at executing its core competencies, and it should stick to them. Warren Buffett would never try to be Reed Hastings, and Reed Hastings should never try to be Warren Buffett. Alas, this is a lesson shareholders have learned the hard -- and expensive -- way.

Fool contributor Morgan Housel owns shares of Microsoft. Follow him on Twitter @TMFHousel. Motley Fool newsletter services have recommended buying shares of Netflix, Microsoft, Google, and Apple. Motley Fool newsletter services have recommended creating a bull call spread position in Apple and Microsoft. 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. The Motley Fool has a disclosure policy.


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  • Report this Comment On November 23, 2011, at 12:44 PM, TheDumbMoney wrote:

    You guys also need to start pounding on ISRG. I love that company and hold shares, but now they too are planning major share buy-backs..., with shares near all-time highs. TERRIBLE idea, may lead me to sell a company I was planning to hold for ten years. Because I am a crank, I have already sent two emails to their investor-relations department about it.

    DTAF

  • Report this Comment On November 23, 2011, at 1:05 PM, tom2727 wrote:

    ISRG is a different case I think. They have no debt, almost 1 bil in cash, and they have a ton of cash flow. If they can't profitably invest all that cash back in the business, buybacks are a good way to give it back to shareholders. It's better than growing a giant cash pile that never gets used. Or worse, trying to build an empire by overpaying for other businesses they don't know how to run.

    AAPL should try it some time.

  • Report this Comment On November 23, 2011, at 1:11 PM, TMFHousel wrote:

    If cash flow truly is excessive, dividends are historically a better way to return money than buybacks.

  • Report this Comment On November 23, 2011, at 2:32 PM, TheDumbMoney wrote:

    tom2727

    Sorry, but there is no difference between overpaying for other businesses, and overpaying for your own business.

    Housel is correct; they should save for a rainy day (less upside, but less downside), until either another company or their own is patently and clearly undervalued. If the cash flow is just out of control, they should implement a modest, low-payout-ratio dividend. Again, there is zero difference between ISRG overpaying for MAKO or ARAY, and ISRG overpaying for ISRG. You do not buy-back your stock when you are hitting all-time nominal highs, you just don't. It rarely ends well if you do. Now, it may end well of course: I think ISRG will be a much bigger company someday, so maybe that's a little inconsistent with my views. But a company faces an extremely high hurdle to show that buying back shares is the best use of its cash flow. I hold ISRG as a Fisher-style long-term growth investment (shares were bought at $254/share, $287/share, and $353/share), but I do not see a compelling argument that it is undervalued at +$400/share, which is apparently where this company has now decided it wants to do hundreds and hundreds of millions in stock buy-backs. I as an investor don't think ISRG is going to maintain $400/share and always go up. It wouldn't shock me at all if they see $300 again within the next year, if there is a recession. At the end of the day will buy-backs be more accretive to future cash-flows per share than an acquisition will? It depends upon the acquisition of course. But at the very least if they are going to do buy-backs it needs to be a consistent buy-back program, through thick and thin; evidence so far shows that is not what this is. This is a happy-happy-joy-joy buyback while everything is good. (And at worst it's a way to disguise executive option grants.) Any time a company is buying back an amount of shares it would not be willing to buy back at the DEPTHS of a bad recession, then it is buying back too much. How much stock was ISRG buying back in 2008? Not much is how much.

    All best,

    DTAF

  • Report this Comment On November 23, 2011, at 4:02 PM, jimmach123 wrote:

    Anyone want to look at their "buybacks" and see if there is a correlation to Reed Hastings' dumping 5K shares/week? Can anyone say share price prop-up? When the CEO is selling consistently, ie every week for 6 months, something is not right. Hope he enjoys his $40+ million. This is one stock that if you were a long-time holder and had a major profit, then at $300 if you owned 100 or 1000 shares, you should have sold ITM covered calls and hedged with a load of puts.

    LNKD is next on the train ride to the bottom...give it 6 months.

  • Report this Comment On November 23, 2011, at 4:08 PM, BioBat wrote:

    jimmach123, Hastings has been selling 5-10K in stock options every week since Netflix went public in 2002. It wasn't something that was just crafted as the stock climbed above $200.

  • Report this Comment On November 23, 2011, at 4:20 PM, nin4086 wrote:

    The study that looked at buyback in up markets vs down should correlate insider selling with the buyback. I am sure CEOs are not idiots. It is just that they look out for their own interest first; buyback when stock is high takes it higher and gives better returns on insider selling. Netflix was a good company but it is time to change its CEO...this one has been trying to run it like a Ponzi scheme, assuming that subscriber growth will keep paying for new content (you should it able to pay for content from revenue generated by existing subscribers). You cannot assume growth will fuel growth.

  • Report this Comment On November 23, 2011, at 4:21 PM, EquityBull wrote:

    Why does MF keep recommending NFLX when they have showed poor management of their finances and likely will continue to do so. They have shredded shareholder value buying their stock back at such a sky high valuation.

    Companies like Apple do make sense for a buyback since they are low multiple and low PEG. Apple trades for 8 times 2012 earnings assuming they don't blow away those numbers (ex-cash). They are growing 35% plus making a buyback a no brainer. They should have been buying back stock aggresively over the last few years but that is the past and you cannot go back. However going forward I would want Apple to buyback shares until their PEG at least was close to 1.0

  • Report this Comment On November 23, 2011, at 4:25 PM, zerafa wrote:

    i am happy, i sold all my netflix in three batches on the way up, locking in at 8x, 12x and 14x. Could have held for more, but i dropped out when it got crazy. I would not come back in over $50. So, i think the company getting $70 is good. the bad was buying at 200, should have been selling the stock at the price....

  • Report this Comment On November 23, 2011, at 4:35 PM, TopAustrianFool wrote:

    I think you are looking at this from the stand point of an investor. NFLX doesn't see it your way. From the stand point of a business NFLX $200M in debt now is $200M in 1st QTR of 2011.

    Even if NFLX had not bought back the $200M worth of stock in 1st QTR of 2011, doesn't mean they would have the $200M now.

    With all due respect, I think you are missing some perspective because you have never run a business. But there is some subjective value that spurn the moves companies make when it comes to debt and cash.

  • Report this Comment On November 23, 2011, at 4:38 PM, TMFHousel wrote:

    ^ <<From the stand point of a business NFLX $200M in debt now is $200M in 1st QTR of 2011.>>

    I'm not sure I followed that. Can you elaborate?

  • Report this Comment On November 23, 2011, at 4:41 PM, xetn wrote:

    I think Netflix have renamed their stock symbol from NFLX to HSTRY.

  • Report this Comment On November 23, 2011, at 4:48 PM, rmoreira wrote:

    I would say if a company wants to reward its shareholders, rather then buying back stock, give a special dividend, start a dividend or increase the dividend. Buying back stock only makes results look better by reducing the denominator!

  • Report this Comment On November 23, 2011, at 5:05 PM, TopAustrianFool wrote:

    "I'm not sure I followed that. Can you elaborate? "

    They are not trying to make money by investing in NFLX stock. Is that simple enough.

    Maybe the have a long term stake in NFLX. What do you think?

  • Report this Comment On November 23, 2011, at 5:14 PM, TopAustrianFool wrote:

    I understand that you are thinking that if the stock price goes from $70/share to $200/share and they try to buy the shares back then they will show a net loss. But they don't see it that way. They don't have to buy the same amount of stocks they just sold, they could just buy $200M worth of shares again.

    In a way they are concerned with other moves and dealings than pure "buy-low and sell-high" moves.

  • Report this Comment On November 23, 2011, at 5:16 PM, TopAustrianFool wrote:

    Not esoteric business reasons, but business reasons that you are not privy to, because you don't sit in the board.

  • Report this Comment On November 23, 2011, at 5:20 PM, TopAustrianFool wrote:

    "They're selling $200M worth of shares for 70% less than they paid for"

    They don't care since by issuing more debt they are effectively devaluing the shares anyway. So obviously there is some reason they believe, right or wrong, that the $200M in new debt will make up for the depreciation.

  • Report this Comment On November 23, 2011, at 5:44 PM, TheDumbMoney wrote:

    TopAustrian,

    You're blowing my mind here. It has nothing to do with net loss or with buying high or selling low, or with the actual sales loss they would take if the transaction were like one of our stock purchases and/or sales. That is beside the point.

    The problem has to do with the inflated per-share amount NFLX paid earlier this year to increase its EPS and/or FCF/share. That is the issue. It is merely compounded by the fact that it apparently ALSO now needs twice that amount of cash to fund future content acquisitions and/or operations, or to simply have a stronger balance sheet.

    To put it another way, if they hadn't done the buy-backs then, but did them all today, they could spend approximately $50 million instead of $200 million to buy an identical inflation of EPS. They paid 4x what they could have paid for the EPS boost, and they did it when the didn't have (apparently) a proper cash cushion.

    DTAF

  • Report this Comment On November 23, 2011, at 6:20 PM, shayeg wrote:

    I think we can all agree that the buy back was not good in retrospect. Of course, if the shares had gone up and continued its course,or at least stayed steady at the high mark, nobody would have been complaining so loudly. So, the question is why the shares dropped so precipitously and should the CEO have foreseen that. I think that there was a grave mistake made in the way they chose to break apart streaming from the mail order business. They (and the shareholders depending on their decisions) paid dearly for that. Is the company still worth investing in? If the answer is yes, then they need to fund their future growth. Should the company just roll over and play dead because they made a grave mistake? Or, should they get up and try to move on? If you have no faith in the future of the company, you should get out. If you think the gamble they are taking by increasing debt to fund future growth is a good one, you need to have patience and ride this out.

  • Report this Comment On November 23, 2011, at 6:31 PM, FutureMonkey wrote:

    I kind of wish they'd ask me what they should do with the cash. As a shareholder, I'd almost always prefer a dividend to sharebuybacks. I'm always suspicious that buybacks are used to mask share dilution in exhorbitant compensation packages. Seems to me management would rather tell shareholders they are using cash to buy back $200M in shares rather than funnel $200M in bonuses to executives. One seems so much more shareholder friendly, but amounts to the same thing.

    FM

  • Report this Comment On November 23, 2011, at 6:44 PM, IsaCann wrote:

    Does anyone have any knowledge of what netflix management intends to do in the next several quarters to return perceived value (stock value) [for dumb arses like me who didn't sell when they should have please]?

  • Report this Comment On November 23, 2011, at 6:45 PM, TMFHousel wrote:

    << Of course, if the shares had gone up and continued its course,or at least stayed steady at the high mark, nobody would have been complaining so loudly. So, the question is why the shares dropped so precipitously and should the CEO have foreseen that.>>

    See, I don't really see it that way. If a CEO repurchases shares and the shares fall, that happens. No biggie. But if, three months ago, the company said it was repurchasing shares because it didn't need excess cash, and then after shares crash by 70% it sells shares to raise cash it says it doesn't need, that to me is inexcusable.

  • Report this Comment On November 23, 2011, at 6:59 PM, IsaCann wrote:

    Yes. Unexcusable bahavior. Now what sort of public company news explains how the value will increase again? Help a newbie.

  • Report this Comment On November 23, 2011, at 7:38 PM, TheDumbMoney wrote:

    IsaCann, if any of us knew for sure that Netflix or any public company would increase in stock price, or do super-well, we'd be retired.

    It sounds like you're looking for an excuse to continue to hold the stock. If you run some Google searches, Whitney Tilson (of T2), who formerly shorted it, has recently laid out a case for going long at this time. There are some positive articles on this site as well.

    However, the best advice any newbie or anyone can get is to continue learning how to invest in companies, to keep learning about income statements and balance sheets, and how cash flow statements are formuated using them. Understand what return on assets measures. Understand what return on equity measures, and understand the Dupont Analysis components of ROE. Start trying to estimate the value of companies using free cash flows. Start thinking about the limits of that analysis, both because estimations are never correct, and because not all companies employ their FCF and/or earnings wisely (see above). Learn when book value matters and when it does not. Learn when PEG matters and when it does not. Learn the limits of P/E. Start thinking about what moats are and how they are grown and maintained. I suggest extensive use of Investopedia, and Morningstar's free lessons on investing, plus these three books to start with:

    1) The Warren Buffet Way, by Hagstrom. This will give you a basic overview of the style of one of the greatest of all investors, who incorporates aspects of Fisher and Graham, including case studies of his investments. This is not a "classic", like the below two books are, but is an excellent entry-level primer on fundamental investing, a warmup for the below two.

    2) The Intelligent Investor, by Benjamin Graham. Buffett's original mentor, the uber value guy, and an excellent source for understanding stocks.

    3) Common Stocks and Uncommon Profits by Philip Fisher. The dean of "growth" investors, his classic text. At a minimum, reading this will teach you why most of us are not really cut out for this type of investing.

    I suggest reading these books in the order stated.

    If you haven't read these and aren't willing to read the above three books, and you aren't otherwise willing or able to try to learn a significant amount about the topics otherwise discussed above, then I suggest you either:

    1) Don't invest/speculate with another dime; or

    2) Invest only in index funds and ETFs; or

    3) Take the alternative path of trying to learn trading based on technical indicators, which is shunned by many on this site, including me (except as a supplement), but which a relatively tiny number of people do make somewhat consistent profits, by using proper risk management principles to make money (and limit losses) even if they are only "correct" in their actual directional technical calls between 25% and 40% of the time. (Very hard to succeed at technical investing, even harder than with fundamental, imho.)

    So. That is the best help for a newbie, not what people think NFLX is going to do.

    DTAF

  • Report this Comment On November 23, 2011, at 7:49 PM, MatiasR wrote:

    I'm subscribed to a whole lot of MF services and I've got to say guys, sorry, but you have to stop pumping Reed Hastings. His messing up far too bad. He might have been a bright mind in tech and media, but he's kicked his customers and his shareholders in the face one too many times. I agree LNKD at these valuations is trash, and that's why I've been short the stock for months, just like I'm short Groupon and Pandora. Things don't add up with them. And painfully enough, they are not adding up for Netflix either. Unless there is real change in management, I don't see a clearer future for the company, its business or its stock price.

  • Report this Comment On November 23, 2011, at 8:16 PM, TopAustrianFool wrote:

    "The problem has to do with the inflated per-share amount NFLX paid earlier this year to increase its EPS and/or FCF/share."

    How do you know this is the reason they bought the shares back? Basically again you are assuming that management is thinking like an investor. You are way too caught up in stats brother.

  • Report this Comment On November 23, 2011, at 8:33 PM, TheDumbMoney wrote:

    Top,

    Give me a "not thinking like an investor" reason for any company to buy-back shares that is somehow positive for the actual investors in the company, either in the short or the long term. I can't think of one, and I don't think one exists.

    Alternatively, explain how you think NFLX was possily not "thinking like an investor" in its own purchases. In my hypothetical, which I think reflects common-knowledge reality, it is to improve earnings per share by changing the denominator. But if you don't like this, and my obsession with stats, whatever that means, give me even a plausible alternative hypothetical reason for such a purchase.

    Thanks,

    DTAF

  • Report this Comment On November 23, 2011, at 9:06 PM, InvestWhatWorks wrote:

    Nearly all share buybacks are a terrible idea. I would drop the "nearly" and say "All share buybacks are a terrible idea", except I'm sure someone could find a handful of isolated-examples where it turned out well.

    This should be a lesson to all public companies everywhere... but it won't be. Companies will still do buybacks and it will continue to be an awful idea.

    If you have nothing else to do with your money (other than investing it back into the company... which is precisely what Netflix should have been doing from the start), give that money back to shareholders as a dividend.

    Or at the very least, if you absolutely have to do a share buyback (and there is nothing anybody can say or do to convince you otherwise), now would be the time to start buying back your shares; after they have fallen so much.

    Buy high (real high!) and sell low (real low!). Awesome plan, guys.

  • Report this Comment On November 23, 2011, at 9:18 PM, AceInMySleeve wrote:

    "That is the best help for a newbie, not what people think NFLX is going to do."

    If reading those books doesn't translate into you being able to determine whether a given stock (say, NFLX) is going up or down in the future, then they are useless.

    An astrologer has all kinds of fancy books. It helps them to sell their words. People are bad at verifying that the words achieve their purpose, particularly when they are motivated to believe otherwise.

    As to the subject, it's clear in hindsight that Netflix f'd up and it's also quite clear that they had no idea this mess was coming. But when you wake up in November and need cash it dosesn't matter at that point what happened in October.

  • Report this Comment On November 23, 2011, at 9:28 PM, Mstinterestinman wrote:

    I bought at 100 and sold at 200 I enjoyed my easy double did the same with GMCR but both companies long term are good as extinct.

  • Report this Comment On November 23, 2011, at 10:33 PM, jmb327v8 wrote:

    any company which buys back stock is wasting cash. see/read about too many companies squander cash and go out of business. probably not a wise choice

  • Report this Comment On November 23, 2011, at 11:07 PM, jm7700229 wrote:

    NetFlix was grossly over promoted by MF based on ridiculously high projections. The price now is not bad, but they are quickly becoming commoditized and they need to move VERY aggressively to capture markets outside the US. The buyback suggests they aren't that ready to invest in themselves, so I think they may be going the way of MySpace.

  • Report this Comment On November 23, 2011, at 11:27 PM, Merton123 wrote:

    I don't believe that MF has a moat around its service. We will find out.

    Stock Buybacks are sometimes used to take a company private. Stock Buybacks could be a way to help management hit the right price to exercise their stock options - a cynical perspective. Stock buybacks are taxed at capital gains tax rate. Dividends are taxed as ordinary income. That could become important as we move forward in time.

    Small rapidly growing companies usually have the problem of issuing more stock in IPOs and diluting the current owners equity. Stock Buybacks is more of a sign of a mature company whose stock is languishing.

  • Report this Comment On November 24, 2011, at 12:57 AM, mikecart1 wrote:

    New MBA Course Case (I posted this on another forum too):

    Titled: How To Quickly Destroy Company Market Cap & Shareholder Confidence

    By: Reed Hastings

    Step 1: You create a business model that is bad from the start. Poor revenues. Poor customer retention. Poor product line.

    Step 2: You maintain a mediocre existence for at least 5 years.

    Step 3: You finally get revenue and overstate your future potential to make stock go up 1000%.

    Step 4: You fail to change your business model.

    Step 5: You double the cost of your product and lose over 25% of your customers within a single quarter.

    Step 6: You issue a plan to split your business into two.

    Step 7: You sike everyone out and say you were kidding about Step 6.

    Step 8: You do a share offering for 1/3rd your stock's peak price which was just a few months ago.

    Step 9: You fail to address Steps 1 through 8.

    Cheers!!!!

  • Report this Comment On November 24, 2011, at 5:06 AM, cheesepare wrote:

    TopAustrianFool, if you're trolling, I'd say you're doing a pretty good job. Otherwise...

    There simply isn't any justification for the buybacks at $200+ a share. It's was a gigantic waste of capital. They may as well have burnt $140 million dollars worth of DVDs and computers. It was a horrible mistake. We're not talking about a beyond a reasonable doubt standard, but beyond any doubt that any rational person could conceivably articulate. In short, you are defending the indefensible.

  • Report this Comment On November 24, 2011, at 6:25 AM, WeWereWallStreet wrote:

    Click on their two year graph and it make you want to cry. A nice steady climb up the mountain and then a fall off the cliff.

    We are pretty bearish on dot.com III, as we discuss at www.WeWereWallStreet.com/About-Us.html, especially of the Groupon and LinkedIn variety. But we knew some Netflix people, don't really think of it as a pure dot.com, and thought this one was a winner. It's too bad their wounds are self-inflicted.

  • Report this Comment On November 24, 2011, at 9:31 AM, decbutt wrote:

    I don't think that EVERY company that buy's back shares is wasting money - e.g. AHT when the SP was below $2 a share

    But this case is a humdinger.

    Great article.

    The baffling thing is that when the CEO spoke I am sure that the shareholders just sat there and nodded, rather than shouting "are you INSANE!"

    He, at least, must have been fully aware of what he was doing. The fact that he can do that to shareholders' face says it all:

    No respect.

  • Report this Comment On November 24, 2011, at 10:32 AM, TopAustrianFool wrote:

    "give me even a plausible alternative hypothetical reason for such a purchase."

    Any time you have cash and your stock is in a strong position it will always be better for your company, you and your investors to reduce dilution on the outstanding shares. It increases the equity which is available to you to make longterm investment moves later. It also puts you in a stronger position even in the event of share price dropping because it helps you ward off things like hostile take overs, etc. It may also allow you to issue more debt later at a time when you can purchase other things at a better price. There are millions of reasons, just because you can't think of something it doesn't mean it doesn't exist.

    It is not as simple as buy-low and sell-high. Of course we tend to look in hindsight and think it is a bad move, but in January NFLX did not have the benefit of hindsight. You can say that you saw it coming but how many times we have seen companies with stats that say the share price is too high, to only see that share price continue to increase.

  • Report this Comment On November 24, 2011, at 10:46 AM, Merton123 wrote:

    The top Austarian Fool has a good point. There are times that a stock buyback could be an appropriate business strategy (e.g., taking the company private).

    Net Flix for a period of time was a rapidly growing company. The investors who identified this company early on made a lot of money. Will Net flix continue its rapid growth like Apple? The market consensus is no - and that is why Netflix stock price is beginning to fall. Is the market wrong? I don't think so.

  • Report this Comment On November 24, 2011, at 11:52 AM, TopAustrianFool wrote:

    Hey Truth,

    I can see that you can make a suspicious argument. You may be right. I supose time will tell.

  • Report this Comment On November 24, 2011, at 11:53 AM, TopAustrianFool wrote:

    I hope everyone has a great Thanksgiving holiday weekend!

  • Report this Comment On November 24, 2011, at 12:13 PM, TheDumbMoney wrote:

    The key point TopAustian misses is that when a company is buying its shares, it is no different from buying another company.

    We would never say it was A-Ok for a company to overpay for another company. Equally, it is unacceptable for a company to overpay for its own shares. There is no difference. It is just as acceptable to criticize these buybacks as it is to criticize HPQ's purchase of Autonomy.

    And no, reducing dilution of earnings is not always a good thing. TopAustrian, would you defend Netflix if it had randomly decided to pay $50,000 per share in April through July 2010? Of course you would not. Thus, at root your argument boils down simplistically to an idea that it was reasonable for Netflix management to think in April-July that its shares were still undervalued, or reasonable valued.

    Strip away everything else, and that's all you're saying.

    But even that is wrong. One can always point to hindsight, as you do, but this was not a tough call, at least as to share buy-backs. When Netflix was doing these purchases it had less than $350million in cash on hand, and it also already had $200 million in long-term debt! And it was obvious that as the all-important Starz deal expired, it was going to need ever more cash. And it was a growth company trying to expand in a niche quickly before other larger competitors could gain an ever-greater share. And it was valued at an all-time high of P/E, a PEG in the 3-to-4 range (!). That was not the profile of a company that should ever, ever, ever have been buying back shares. And of course, now they have to raise money.

    In fact, I would argue it was actually more reasonable for private investors to own shares of Netflix in July and continue to hold them through the fall than it was for Netflix to buy back its own shares last Spring.

    Happy Thanksgiving though!

    DTAF

  • Report this Comment On November 24, 2011, at 12:13 PM, TheDumbMoney wrote:

    Happy Thanksgiving to you, too TopAustrian. It's all academic of course.

    DTAF

  • Report this Comment On November 24, 2011, at 12:14 PM, TheDumbMoney wrote:

    Truth,

    I think there are decent reasons for share buy-backs, so I agree. I just think they have to be judged by exactly the same standards as would a purchase of another company.

    Happy Thanksgiving, all.

    DTAF

  • Report this Comment On November 24, 2011, at 12:19 PM, TheFreeInvestor wrote:

    In the spirit of completeness, instead of picking a timeline that works in favor of the article, how about looking at the history of share repurchase at Netflix? Here is note from WSJ -

    "... Netflix paid an average price of $45 a share for stock repurchased since 2007, below the current level of $72..."

    http://online.wsj.com/article/SB1000142405297020371070457705...

    So, over the years they have bought their stock at $45 on average and now when they need money they are issuing new stock at $70. Looks like management decided to not time the market and continue buy back with their excess cash.

    Doesn't mean that I am not faulting the management. Here are few things I agree -

    - dividend would have been better. But, probably management was using buy backs to mask stock option dilution.

    - management should have stopped buy back earlier if they saw this huge capex coming up soon.

  • Report this Comment On November 24, 2011, at 1:12 PM, TMFHousel wrote:

    TheFreeInvestor,

    That's a fair point to bring up, thanks. But I still don't think it absolves management or justifies the recent moves. I think the most important point, as you note, is that "management should have stopped buy back earlier if they saw this huge capex coming up soon." And "coming up" wasn't one or two years in the future; it was a few weeks away (Netflix was repurchasing shares as recently as September).

    No company will ever get everything right, but some mistakes are more glaring than others. Citigroup, for example, has in aggregate made money over the last 12 years, but that's no solace for the disastrous losses of 2008-2009.

    Thanks, and happy Thanksgiving.

    Morgan

  • Report this Comment On November 24, 2011, at 1:15 PM, mevv wrote:

    Until Netflix can provide users with digital content that they actually want to watch, I don't how it can still be considered an innovative stock. Amazon actually does a better job on an ala carte basis. There's no moat here anymore.

  • Report this Comment On November 24, 2011, at 1:42 PM, TheFreeInvestor wrote:

    Morgan - I agree with your point about the apparent bad capital allocation by management in recent past. It looks like they have abdicated their capital allocation decision to the market -- "if we have cash, we will keep buying our stock. The moment we run out of cash, we will go to market and raise capital." if that's the case, do they really need a highly compensated CFO? Probably not :-)

    Happy thanksgiving to you too !

  • Report this Comment On November 24, 2011, at 3:08 PM, TopAustrianFool wrote:

    Morgan,

    "Citigroup, for example, has in aggregate made money over the last 12 years, but that's no solace for the disastrous losses of 2008-2009."

    Yes, by lobying, govt hand-outs and bail-outs. Please, C and BAC are bank cartels (govt sponsored monopolies), you can't compare that to companies like AMZN or NFLX, which actually have to compete in the Free-Market.

  • Report this Comment On November 24, 2011, at 3:15 PM, TMFHousel wrote:

    ^ Wasn't a direct comparison; just noting that good business practices in the past can't always be used as justification for poor business practices more recently.

    Happy thanksgiving.

    MH

  • Report this Comment On November 24, 2011, at 8:27 PM, Merton123 wrote:

    Happy Thanksgiving to all. I just got in from a Thanksgiving Dinner. Plan to go out and see the movie Hugo Tonight.

    I believe that we have exhausted all discussion angles for stock buyback.

    The Wall Street Journal just had a recent article about Bill Gates and Miscrosoft and having the equivalent of one years expenses in cash. In this economy that is probably good advice for all companies and also for most individuals.

    I predict that the next five years Value Investing will win over Growth investing. What do you all of you think?

  • Report this Comment On November 25, 2011, at 1:16 AM, TurbulentTime wrote:

    My family, my uncle's family have both dropped our subscription to Netflix. We really like streaming video from Amazon. And since we have our iPad2, we also have started to stream videos from Apple. I do not think that Netflix has a chance in the long run compared to both Amazon and Apple. I have sold all my shares of Netflix long ago, and I am not a short either. I have profited from it, and I think there are more innovative companies than Netflix at this point in time. Netflix was once a very attractive company to me, but no longer is it attractive anymore. Time to move on, and profit from another company's growth. Thank you Netflix.

  • Report this Comment On November 25, 2011, at 1:23 AM, TurbulentTime wrote:

    Oh, by the way, yes Happy Thanksgiving to all.

    "I predict that the next five years Value Investing will win over Growth investing. What do you all of you think?"

    I think that both value investing and growth investing can go hand in hand, especially in this turbulent market. Why? I have read everywhere lately that many analysts have been screaming about teach stocks are undervalued, restaurant stocks are undervalued, consumer staple stocks are undervalued, etc. However, many of the companies that talk about are also growth companies. Can one say that Apple is not growing? Yet, its p/e is under 14 this year. This is just one example. And I have 100% in cash position, I can take advantage of more values to come if market conditions continue to deterioate. "Timing is everything. It determines your long-term rate of return when the market gets back to normal conditions." - from someone I know, if not Warren Buffett.

  • Report this Comment On November 25, 2011, at 1:25 AM, TurbulentTime wrote:

    Sorry typo "teach stock" should read "tech stock"

  • Report this Comment On November 26, 2011, at 3:55 PM, LMD1933 wrote:

    MF has lost all credibility. I am a subscriber to several of their services, thought carefully, and did ALOT of research prior to the 2 purchases I made. I LOST MORE MONEY THAN I THOUGHT POSSIBLE WITHIN THE SPAN OF ONE MONTH. I do not buy the line that most of the two fools money was in Netflix, they are doing straddles and making money at the expense of the average investor just trying to make a little money on their 401K.

    In my mind the two fools have earned more of a reputation of right up their with Bernie Maddof, and the rest of the Wall Street insiders.

    You might as well go to Las Vegas, any FOOL would have better odds there.

  • Report this Comment On November 28, 2011, at 8:14 PM, plantoretire1day wrote:

    Does Netflix pay a dividend? Anyway, Netflix had a trusted household name that is going in the toliet, both with layman investors and subcribers who may be feeling the recent price increases.

    I would Not have thought Blockbuster had a way to come back strong (through Dish service for instance), but Netflix may have given Blockbuster a boost by their recent 'shenanigans' ! Hey, I made a funny. :-), But seriously, I am thinking about switching from cable to Dish with a Blockbuster feature and dropping Netflix.

    P.S. It's a double whammy when you're an investor and subscriber. Ouch!

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