CEO of Netflix Responds Publicly To Short Seller

A good rule of thumb that has served me well over the years - if the CEO of a company that you own shares in publicly responds to a short seller, then it is usually a good idea to go ahead and at least re-evaluate your position in the company.

In short - it's usually not a good thing when a CEO feels the need to defend his company in public against a short seller. In my experience, CEOs generally lash out because the negative commentary from the short seller was right on the mark, and the CEO feels the need to defend his company and keep shareholders from bailing.

A CEO can make short sellers pay by continuing to build their businesses and increase shareholder value. A CEO who truly believes in their company will relish the attention of short sellers, as their inevitable short covering when they are proven wrong will simply propel the upwards move of the stock even higher in the future.

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Late last week, Whitney Tilson, who is the founder and managing partner of T2 Partners LLC, released a 22 page document titled "Why We're Short Netflix".

Tilson, in a very nice way, made the case for his company's sizable short position in Netflix. Tilson argues that Netflix is pretty much priced to perfection ($178.05/share, $9.3 billion market cap), and that the company is facing a litany of challenges over the coming years (increased cost of acquiring content, increased competition in the streaming movie market, customers perhaps having to pay for excess bandwidth usage one day, the recent departure of the NFLX CFO, etc).

You can read Tilson's manifesto here. No matter if you are long NFLX, short NFLX or have no position whatsoever, it's an interesting read.

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Reed Hastings, CEO of Netflix, took to Seekingalpha.com yesterday to issue a point-by-point response to Tilson. It should be noted that Hastings and Tilson are on very friendly terms (Hastings calls Tilson a "great investor and a wonderful human being"), so the Hastings' response is considerably less hostile than what we normally might be accustomed to hearing when a CEO publicly responds to a short seller.

Hastings said that "odds are he (Tilson) is wrong on all" of the reasons why Netflix may fall over the coming years, and then he went on to address each issue that Tilson brought up.

Interestingly enough, Hastings offered that "our valuation is substantial" and that "it is possible that one could make money shorting Netflix today". It's not often that you will hear a CEO say those types of words about their own company. But Hastings did close by saying that "shorting a market leading firm as it is driving a huge new market is a very gutsy call".

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As mentioned, NFLX is currently trading at $178.05 and has a total valuation of $9.3 billion. The stock is up an eye-popping 234.2% over the last 12 months.

Who do you think will end up being proven right - Hastings or Tilson?

Also, did Hastings make a mistake by addressing a short seller in a public forum?

Filed under: General Market News