At the beginning of the week, Reed Hastings, CEO of Netflix (Nasdaq: NFLX), published a rebuttal to the short investment thesis previously published by Whitney Tilson, an act Tilson respected. That's generated quite a bit of comment, both supporting and not. Many think it was improper of Hastings to so spiritedly defend his company from what might be a short attack. It was beneath him, they say, and has even been compared to John Mackey, CEO of Whole Foods Market (Nasdaq: WFMI), and his posts under the pseudonym "Rahodeb."
Here's what I think.
Just like the other?
First, I do not think it is comparable to the Rahodeb postings. Mackey pretended to be someone else and never disclosed that he was the CEO, so people could not properly put his comments into context. Hastings' letter, on the other hand, was signed with his own name, and he disclosed at the end that he was the CEO of Netflix. That puts an entirely different weighting on it. This was a one-time event (so far), not a long series of posts.
Second, it is not unheard of for a CEO to discuss his company, especially when he views his responses as defense against an attack. Patrick Byrne, CEO of Overstock.com (Nasdaq: OSTK), is known for waging a war against naked short selling of the shares of Overstock (that is, borrowing shares to sell short that were not actually available to be borrowed). However, Hastings might not be so desirous of being lumped in with Byrne. Of course, Hastings' response to Tilson was a lot more polite than a lot of what Byrne has said in the past.
Improper!
Actually, I think any outrage comes down to a sense of propriety and what is considered proper behavior for a CEO. Let's consider this further.
Did Hastings discuss anything that has not been discussed before, by either himself and his management team or analysts of one stripe or another? I don't think so. The bull arguments have been well aired, so the perceived problem doesn't lie there.
Maybe it's the idea of talking up your company. A lot of comments I've read call him out for that. But consider that management teams routinely go and present their companies to analysts or investors at conferences, often sponsored by the big banks. In other words, management goes specifically to talk up their companies. So if Hastings did that in his response, it shouldn't be the problem; or if it is, that's a bit hypocritical.
All right, then … it has to be the fact that Hastings is attempting to correct a view held by an analyst, yes? Well, I'm not so sure. I've heard Netflix's management correct analysts on conference calls when they misunderstand something regarding Netflix. For instance, Hastings has said before that margins are controlled by management. That can certainly be viewed as an attempt to correct the popular belief that margins will contract as competition heats up. So correcting an analyst's misunderstanding shouldn't be the problem here. After all, nobody objected to it when it was done under other circumstances.
So what does that leave? Protecting the stock price, maybe, especially for his own gain. Oh, good one, and popular to boot. Everyone knows that short attacks are meant to drive the stock price down, something management is supposed to hate. Except this doesn't hold water either. Hastings has been exercising and selling options on a regular schedule for a long time, regardless of where the stock price is, up or down.
Shameful!
So what's his sin, then? Maybe it's telling the emperor that he has no clothes. That is, Netflix's management probably understands a great deal about the dynamics of their business, the level and types of competition out there, the workings of the Internet, and the consequences of various changes to it. With all that business knowledge, Hastings has told the bears, with Tilson probably the most famous, that their argument as laid out is flawed.
The emperor has no clothes. Announcing that is a big no-no, no matter who you are. Fie, Hastings, fie!
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