Greenberg: Questions Shorts Want Netflix to Answer

With its stock in nosebleed territory, Netflix can’t afford to miss any kind of expectation—even perceptions.

That means the questions it receives on its earnings call after the close today—and the way it answers them—will be as important as the numbers.

And as has been the case for well over a year, Netflix goes out of its way to avoid any nasty surprises in the question-answer period by only accepting questions by email—and then, it would appear, only answering those that can’t hurt them. (Talk about control!)

What questions do shorts want answered? The following list is from Lenny Brecken of Brecken Capital, who is usually long stocks. I’ve known Lenny for 20 years and when he goes bearish on a name I pay attention. (His track record with me is that good, especially Garmin , which he sounded the siren on for competitve reasons when it was just about at the same point in the stock market cycle Netflix is today.)

Among his concerns with Netflix, which he has been short since September:

  • He believes management is “overstating subscribers, thereby overstating mis-valuing the company.”
  • Content costs are under stated based on a prior $30 million deal with Starz that is expected to be renewed at $200 million-plus.)
  • Larger competitors are about to enter the market.
  • The addressable market, as big as it may seem, is limited.
  • A large amount of insider selling and issuing debt for a stock buyback—always a red flag.

Among the questions he would like to see answered:

  • Why is free cash flow declining?
  • The rate content costs are being added to the balance sheet is outpacing the rate at which they’re being amortized, which means less expense is hitting income statement. What happens when you have to start expensing all of those costs?
  • Free subscritions appear to be driving growth. Why shouldn’t that concern me as an investor?
  • A quarter a ago you switched to a two-tier subscription plan: $7.99 for streaming only and $9.99 for streaming and unlimited DVDs. You also said that by the fourth quarter, which you reported today, more than half of your customers would watch most of their content by minutes on streaming rather than a DVD. What percent of your subs are paying $7.99 for streaming only?
  • You’re believed to be on the verge of doing some kind of new deal with Starz. If you do, will it be exclusive? And if not, how will you differentiate yourself from the competition? And how will you afford it with sliding free cash flow?

My take: As I’ve said before, CEO Reed Hastings & crew built a great company with superb execution. Any red flags I’ve flown over this company over the years, as it turns out, have been irrelevant.

The business model simply powered through. At this point, thought, it’s not the same company in the same competitive environment. This is about the stock, not the company —and by most standards it is priced for perfection—and beyond.

Questions? Comments? Write to

Follow Herb on Twitter: @herbgreenberg


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