Author: Torsten Jacobi
Covestor model: Stable Growth
It’s amazing how self destructive a company can be. Netflix (NFLX), a portfolio holding of mine, has been slowly building an empire with most of the properties of a truly great company. It’s bewildering that after more than a decade of stable growth a company can self destruct so easily. I’m referring to the recent debacle over the Qwikster spinoff.
There is no doubt that NFLX pricing plans have become too cheap. But why even consider splitting the plans? There were lots of rumors of a potential acquirer who triggered all the changes. That might be true, but still it’s a huge management mishap – almost as devastating as HP’s (NYSE: HPQ) self-destruction lately. If there was a potential buyer why not sign the purchase agreement and settle the changes afterwards?
As for pricing, there were simple alternatives which Netflix has used already in the past. It was always an option to stealthily increase prices until they reach the desired level. Providing an additional unbundled option should have been offered – but not a “forced unbundling”.
Also, why does Netflix not charge a premium for new films? It could release films as early as Apple’s (AAPL) iTunes does and charge a $3.99 fee to watch it. Everyone would have more choice, and be better off.
Even more mysterious is the Qwickster decision. Why would you give up one of Americas premier brand names and use Qwickster – a pretty run-of-the-mill startup name? Horrible idea and even worse execution. It’s a good idea they took it back, as there was not much good I could see in this plan.
As for the outlook – I think this is a splendid opportunity to buy one of the premier stocks of the next decade. Netflix has one of the most easily scaling business models combined with a premier cash flow opportunity. As the digital world grows, entertainment will be served via the internet. Branded entertainment (such as movies and TV shows) will become even more global. Netflix already has the most content and knows how to broker great deals. All it needs is a global premier distribution machine (like Google or Amazon has) and it can replace pay-TV in every corner of the world that has broadband. Netflix has already started to go global (Canada, South America). If it can secure rights for India, South East Asia, Australia it can easily multiply its earnings.
My conclusion: The company should get a great new CEO and continue this magic business slowly and steadily without hasty moves and the stock should appreciate alongside that. I’m planning to buy more Netflix stock soon, as I see it significantly undervalued following this event.
