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Netflix CEO Denies SEC Allegations, Insulting Investors in the Process

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Thankfully, it's not necessary to like the CEO, or any other member of the senior management team, of a company you invest in. The important thing is, does he or she have a firm grasp on the business at hand; namely, increasing shareholder value. Owners of Netflix (NASDAQ: NFLX  ) know better than anyone that it's about the bottom line, not the personality of its CEO.

At least, I assume that owners of Netflix have taken an attitude of indifference toward their CEO; how else to explain investing in the streaming video leader? The ego of Reed Hastings, co-founder and CEO of Netflix, is off the charts, and everyone knows that. But this latest example, butting heads with the SEC no less, was insulting.

The charges
The week had gotten off to such a nice start, too. Netflix shares soared on Dec. 4, after it announced an exclusive movie rights deal with Disney (NYSE: DIS  ) . After some reflection, and a more thorough review of the particulars, some of the giddiness surrounding the deal waned, but Netflix shareholders still enjoyed a double-digit jump in value on the day.

So what's all the fuss about? You may recall, it was July 5 when Hastings shared this via his Facebook page:

Congrats to Ted Sarandos, and his amazing content licensing team. Netflix monthly viewing exceeded 1 billion hours for the first time ever in June. When House of Cards and Arrested Development debut, we'll blow these records away. Keep going, Ted, we need even more!

Not surprisingly, Netflix stock jumped about 13% that day, because that's what Netflix stock does -- move on non-earnings related news. Turns out there's a problem with Hasting's post, however. When a company issues material, public information that may impact trading, it has to issue a formal press release, at the least, or, better still, file the information with the SEC. Oops.

On Dec. 6, Hastings received what's called a Wells Notice from the SEC. In it, the SEC says it will pursue one of two options as a result of Hastings' Facebook post: Either initiate a cease-and-desist process, or bring an injunction against Hasting and Netflix for unfair disclosure.

Don't you know who I am?
Hastings reaction to the SEC notice was, predictably, defensive. According to Hastings:

...while we think my public Facebook post is public, we don't currently use Facebook and other social media to get material information to investors; we usually get that information out in our extensive investor letters, press releases and SEC filings, We think the fact of 1 billion hours of viewing in June was not 'material' to investors.

Hastings went on to add that he thought the rise in Netflix stock -- the 13% jump in one day -- had to do with a Citibank research report issued the night before, not his Facebook post.

Does anyone, anywhere buy that? One billion hours of viewing was not material? The billion hours blurb had nothing to do with Netflix's stock price? What's irksome isn't that Hastings blatantly lied; he did. The bigger issue for shareholders is wondering if Hastings honestly believes the investing public is that ignorant. That's insulting.

Better keep your eye on the ball
It's unlikely that Hastings will let a little tiff with the SEC bother him, it's just the SEC, after all. For Netflix investors, that's a good thing. Why? Because there's a lot of work to do. Like finding a way to turn Netflix's 30 million streaming customers, with razor-thin margins of 16.4%, into earnings.

If the rumors are true, Netflix paid a cool $300 million for the Disney deal. If so, Netflix needs to add about 4 million subscribers just to break even on the Disney arrangement. According to analysts, subscriber growth is slowing, and Netflix should end 2012 with only 5 million new customers.

Every bit as critical for Netflix is the news that Verizon (NYSE: VZ  ) and Coinstar (NASDAQ: OUTR  ) are finally ready to introduce their long-awaited video streaming service. Word has it, the new service will cost $6 a month, and Coinstar, via its Redbox kiosks, will continue to provide DVD alternatives to its customers. It will be interesting to see how that DVD option is received, as Hastings and Netflix continue to shun that high-margin business. (NASDAQ: AMZN  ) and its Prime service, boasting a new content deal with former Netflix partner Epix, is another competitor that should be on the Netflix radar. And, though it somehow gets overlooked in streaming video discussions, Hastings would be wise to keep Google (NASDAQ: GOOGL  ) and its YouTube offering in his sights, too.

If you're able to get past Hastings' ego, and his (unintentional?) slight toward anyone who can read, then Netflix may be worth your consideration. Problem is, Netflix's financials still don't add up, and they won't anytime soon.

The precipitous drop in Netflix shares since the summer of 2011 has caused many shareholders to lose hope. Can Netflix fend off its burgeoning competition, and will its international growth aspirations really pay off? These are must-know issues for investors, which is why we've released a brand-new premium report on Netflix. Inside, you'll learn about the key opportunities and risks facing the company, as well as reasons to buy or sell the stock. We're also offering a full year of updates as key news hits, so make sure to click here and claim a copy today.


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