Talk about keeping it all in the family: Netflix's newly issued $200 million convertible debt (part of a $400 million financing announced yesterday) was bought by Technology Crossover Ventures, an investment firm that was co-founded by Netflix board of directors member Jay Hoag, and where Netflix's former CFO Barry McCarthy is now a venture partner. There's nothing untoward about the move and TCV is a long-time Netflix investor. In fact, given the pair's intimate understanding of Netflix's operations, the move could actually be interpreted as a real vote of confidence in the company's future. Or, on the other hand, it could be seen as a sort of hard-luck loan as the company struggles to regain its footing in the wake of massive recent missteps and aggressive expansion plans.
Either way you choose to view the investment, it reverses years of Netflix buying back its stock. Those buybacks, occurring right through this past summer at prices over $200 per share, just prior to the Qwikster and price-raising fiascos, form a picture of the company's corporate strategy being disjointed from its financial management. From a strategy standpoint, Netflix knew it had massive expenses coming - acquiring top-drawer content for streaming, expanding internationally and promoting its streaming service in the face of looming deep-pocketed competition (e.g. Amazon, Vudu, Hulu, TV Everywhere, etc.). However, rather than husbanding its cash in anticipation of these events, Netflix instead spent it on stock buybacks.
The most recent $300 million buyback, announced just 16 months ago, on June 11, 2010, looks particularly ill-considered. At that point, the stock was around $250, having run up from around $40 just two years earlier, on the strength of Netflix's surging subscriber acquisition. The 2010 buyback also came on the heels of another $300 million buyback announced less than a year earlier, on August 6, 2009. Both followed prior buybacks from before Netflix's streaming service caught fire.
What makes all of this even more perplexing is that every member of Netflix's board of directors is an investment professional and/or has executive-level financial experience. This is not a group of token academics or celebrities often found populating boards. Rather, it's a group that has been around the block with Silicon Valley moonshots, familiar with the ups and downs that practically all hot technology-related companies go through. While just down the road from Netflix, Apple was saving tens of billions of dollars in cash, it's a complete mystery how this board could have decided it was beneficial to buy stock back at nosebleed prices. It would have been far wiser to have tapped investor euphoria and sold stock when times were good, stockpiling cash for the expected challenges ahead.
As I've written previously, Netflix's core service is still a terrific value. However, it has a lot on its plate - rebuilding subscriber goodwill and growth in the U.S. while facing strong new competition, expanding into many international markets where the dynamics are very different from the U.S., funding development of new shows like "House of Cards" and acquiring content from studios for top dollar even as it already has billions of dollars already committed under existing licenses. How all of this turns out is yet to be determined.
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