Netflix: When It Rains, It Pours

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By EconMatters

Talk about bad things leading up to other bad things.  Netflix stocks plunged yet another 8% to $68.50 on Nov. 23, two days after the company announced concurrent common equity and convertible notes financings totaling $400 million.

The company said it raised $200 million through the sale of about 2.86 million shares of common stock at a public offering price of $70 per share, for gross proceeds of $200 million, and raised $200 million through the private placement of convertible notes to funds affiliated with TCV, a private equity firm.

Netflix had $159.2 million in cash and cash equivalents, and $206.57 million in short-term investment at the end of September.  But the sum of these two could only cover 40% of its current liability of $968 million as of Q3 2011.  Moreover, the company's Current Ratio (current asset divided by current liability) stood at a scant 1.2, barely above the minimum threshold of 1.  So it is evident that this latest endeavor is to repair its balance sheet and cash flow.

Business 101--Buy Low, Sell High.  When it comes to share buyback and issuance, companies like Exxon Mobil typically do them within its stock price historical range.  Netflix was a $50-range stock before it exploded in 2010.  However, as the chart from the Bespoke Group illustrates, Netflix bought back at triple-digit per share price and had spent $302 million since 2010, while selling low with this latest stock issuance.

This suggests a sign of desperation--the last thing a company wants to do when its stock is already at only 22% of the price four months ago.  Furthermore, it also exposes Netflix management's failure to properly manage its risks and balance sheet, as this current "cashflow crunch" could have been averted had the management been more conservative during the good times.  


Chart Source: Bespoke Group, 23 Nov. 2011


As recent as 4 months ago, Netflix was an almost $300 stock, but mostly due to a series of  strategy implementation blunders by the management, its stock has been on a serious downward spiral losing about 78% of its value from $298.73 on July 13 this year.  This has definitely upset many investors, particularly for those that bought in at 3-digit price when the stock seemed unstoppable.

Now, to add insult to injury, this latest share-prices-diluting move most likely has crushed whatever sliver of support Netflix shareholders still had of the company.  Already having trouble containing a widespread subscriber revolt as it is, Netflix has now managed to also infuriate and alienate probably all shareholders.

Generally, when a company has to do something drastic, such as a $400-million cashflow repair, that might spook an already nervous market, CEOs and corporate executives (this is one reason they get paid the big bucks) need to be able to spin (or sell) it into a positive convincingly to investors and the big boys on Wall Street.  After all, the hit on share price would not have been as significant if all major shareholders have your back.

But judging from the recent Netflix stock momentum, it looks like not only had the big players sold off the shares, a good number of them are most likely shorting the stock.

On that note, we think Netflix shares could have more downside risks unless some extraordinary ground-breaking event emerges to shift the market dynamics.

Although most current shareholders probably have taken a bath on the stock, there are a few who have benefited from the Netflix drama.  For example, WSJ reported that Chief Executive Reed Hastings has been a steady seller exercising options as low as $1.50 for as much as $262 a share.  

Since Mr. Hastings seems to have been able to at least manage his own portfolio risks quite nicely, there could still be hope for Netflix?

Further Reading:

Netflix: Hell Has No Fury Like Subscribers Scorned

Netflix: What Not To Wear At The High Stake Tech Party

All Things Netflix at EconMatters

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MarcusLCrassus's picture

That chart says it all.  I wonder where the bottom is on this dog.  Supposedly their licensing costs are going to continue to skyrocket and they will also be losing some big name shows, but at the same time its already fallen so far.  But if they have to sell $200 million in stock every quarter just to be able to pay the bills they are in serious trouble. 

vipmoneymachine's picture

It is too dangerous to short this stock at this price, I see $100 before the end of the year, major short squeeze.

prains's picture

if you smoothed out the graph it could look like a really nice breast, thanks for that NFLX

pasttense's picture

"As recent as 4 months ago, Netflix was an almost $300 stock, but mostly due to a series of  strategy implementation blunders by the management, its stock has been on a serious downward spiral...

Netflix was never a legitimate almost $300 stock before its management blunders; it was just floating on air. back then. So if Netflix had never announced the price increase with the proposed dvd/streaming split the price still would have crashed. Why doesn't the OP understand this?

A Man without Qualities's picture

I never went anywhere near it myself, but it seemed obvious from the type of things being said that very few buyers were bothering to look at fundamentals, but simply relying on the greater fool theory.  I suspect most of the driver of the price jump from $200 was short squeeze and stock buy-backs.  This company was never generating enough free cash flow to warrant buying back stock as it did, but that's another story.

Amazing how soon the lessons from the NASDAQ bubble are forgotten - lets see what Amazon does in the next six months..

LawsofPhysics's picture

Buy low, sell high.  The song remains the same people.

b_thunder's picture

Who did NFLX "bought back" the shares from @ $250/share?   Their own CEO and other "insiders."

Who will be getting cheap options and will be buying NFLX shares when they bottom @ well  below $50/share?  The same insiders. 

Same as any other company, just looks more liek blatank corruption due to the stock's "high-flyer" status.