Tuesday, November 01, 2011

Netflix is Well Managed - People are Overreacting to Short Term Issues

Netflix and the Data that Lied

This past summer, high-riding Netflix announced an increase of 60 percent in the price of a combination of data streams and DVDs. Netflix subscribers were upset. Then, the company trumped that by announcing that, henceforth, DVDs and streaming would be handled by two different companies, requiring subscribers to use two different web sites.
The result was a net loss of 800,000 subscribers in the third quarter. Netflix stock was trading at close to $300 in mid-July. Today it's trading around $80.

I didn't get the idea of splitting up the company. And that logic seems even more questionable now that they reversed it.  But I still think Netflix is very well run.  I tend to believe we make a mistake when jump all over short term issues for companies that have long term positive track records.

Now I don't have a huge number of companies that I think have long term positive management track records.  But I think Netflix is one of them.  And just like all those jumping on Toyota a few years ago were mistaken (as I said at the time and still believe) I believe those thinking Netflix made huge errors are wrong.  Toyota made some mistakes.  They still were and are better managed than 98% (or more) of companies.

Netflix has made some mistakes.  My belief is the underlying business realities forced difficult choices.  Just sitting around doing nothing (and not "angering customers" was not an option.  They could have handled it better.  But once again I think they are better managed than most all companies - I don't trust them as much as Toyota.

Their stock price (given the business) seemed insane to me.  I liked the management wanted to invest with them.  Couldn't see doing it based on the stock price.  I will be looking at them again.

Today Amazon falls into that camp for me.  I love the management and business for Amazon.  The stock price just seems way to high given the risks (and limited profits so far).  I sold my shares in the last year (below where it is at now).  I hope I can buy again, but at these prices I just can't see it.  If the business improves a lot and the stock price even increases I could buy (it isn't the absolute price it is the price given everything I know and believe now).

The businesses Amazon and Netflix are in are challenging and full of risk.

Netflix stock price Nov 1, 2011 (when this was posted): $80.09.
Updates: Jan 19, 2012 stock price: $103.46.
March 10, 2004: $440

Related: Amazon Keeps Spending, Sales Growing But Not Income - Reacting to Product Problems