Netflix CEO Reed Hastings Is Actually Right

Netflix (NFLX) oh Netflix how do I love thee. Let me count the ways.

1. Stream unlimited movies and TV series to me for $7.99 a month.

2. Well that is about it.

The future of Netflix is in streaming. Netflix has made the pivot from a DVD delivery company limited by distribution centers, physical product and the US mail to an unlimited internet company. I will not pay for cable, but I do pay for Netflix. I would happily pay $20.00 a month for the service I now receive for $7.99. As long as Netflix is commercial free I cannot imagine not having this service.

The news

On December 23 it was reported Netflix CEO Reed Hastings will only receive $1.5M of his $3.0M total stock options. Why is this news when the company has lost 800,000 subscribers and $12 Billion in shareholder value? Does $1.5M less or more options to the CEO worth over $200M even show up on the radar?

The answer is it should not, but this stock is being whipsawed around due to horrible CEO blunders documented in numerous articles. In the hands of this buffoon shareholders have lost 12 billion dollars. Last time I checked a reduction of $1.5M in compensation is not the punishment for losing 8,000 times more than that in shareholder value. This is especially true when he has sold over $100M in stock over the years.

At the very least he should have been publicly fired. I am sure some shareholders wish him to receive the purification Mel Gibson portrayed as William Wallace in Braveheart.

The problem is he is right.

CEO Reed Hastings is right on splitting Netflix Streaming away from the old DVD by mail service. It is not his fault that $12 Billion in bubble shareholder value has popped. One of the reasons Netflix (NFLX) is such an erratic stock is that it is basically two companies held in one stock. First you have Netflix, an internet streaming company with an unlimited future with a high short term risk. The other is Netflix DVD (which should have been renamed Qwikster) a low risk, low growth cash cow business with a limited future.

As a Netflix investor I am forced to essentially buy shares of both companies when my objectives may be to own the risky Netflix Streaming company or the reliable Netflix DVD company. Give the shareholders a choice and hopefully each stock will perform as it should. Those who want steady returns with low growth prospects can buy the DVD side of the business. Those who want to gamble on a company which could dominate entertainment in ten years should be given that chance.

The problem is not unlike the problem Apple (AAPL) faces with its cash reserves. Bert Wilkison alluded to the problem in his December 12 article at Seeking Alpha.

Mr. Wilkison shows that Apple’s large cash reserves are forcing shareholders who want to own Apple to own a portfolio of cash reserves earning a very low return as well. For Apple (AAPL) the solution is to dividend out the cash. For Netflix the solution is for the company to split into two to give shareholders the option of owning the part of the company they wish to own.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in NFLX over the next 72 hours.

Disclaimer: This article is not to be considered accounting or investing advice.