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Netflix CEO takes on stock 'short sellers'

December 20, 2010 |  3:26 pm

Netflix Inc. CEO Reed Hastings on Monday took the unusual step of publicly rebutting arguments that his high-flying stock is headed for a dive.

But compared with many battles between companies and their “short sellers” -- investors who bet on falling share prices -- Hastings’ tone was downright gentlemanly.

Writing on the Seeking Alpha website, Hastings acknowledged that there were “many risks ahead for Netflix, that our valuation is substantial, and that it is possible that one could make money shorting Netflix today. But shorting a market-leading firm as it is driving a huge new market is a very gutsy call.”

Netflix’s shares have rocketed 223% year-to-date as the Los Gatos, Calif., company has shifted its emphasis from DVD rentals by mail to online streaming of movies and TV shows. The stock hit a record high of $205.90 on Nov. 30 but has since dropped 13.5%. The shares lost $1.09 to $178.05 on Monday.

Reedh Hastings’ blog post was a response to a lengthy post on Seeking Alpha last week by hedge fund manager Whitney Tilson of T2 Partners. Tilson has bet heavily against Netflix by shorting the stock, meaning he has borrowed shares and sold them, expecting the market price to tumble.

Tilson admitted that he has “lost a lot of money” shorting Netflix so far, as the shares have soared. But even as other short sellers have cut back on their bearish bets on the stock -- the number of shorted Netflix shares fell to 11.1 million as of Nov. 30 from 12.6 million in mid-September -- Tilson wrote that he still considered the stock to be an “exceptional short idea.”

His beef isn’t with the company itself, Tilson said, but with the valuation investors have given the shares: At $178 they trade for 63 times estimated 2010 earnings of $2.81 a share and 47 times analysts’ mean 2011 estimate of $3.82 a share. With 52 million shares outstanding, Netflix now is valued at $9.3 billion.

With its shift from by-mail DVD rental to online delivery, “Netflix is moving from a business in which it was competing against smaller, dying, heavily-indebted companies with inferior business models to some of the largest, most powerful, aggressive and deep-pocketed companies in the world, which have big competitive advantages over Netflix,” Tilson wrote.

Hastings spends much of his rebuttal post addressing competition issues, and basically argues that Netflix customers are too happy to jump ship for new or old rivals.

“The core competitive barrier for direct competitors is brand/subscriber-evangelism,” Hastings wrote. “Our large subscriber base is very happy with Netflix, and tells their friends about Netflix. . . . There are also lots of other smaller competitive barriers, but the happy subscriber base is the big one.”

Tongue somewhat in cheek, Hastings also appealed to Tilson on humanitarian grounds. Noting that he and Tilson both are donors to charter public schools, Hastings wrote that he was eager to see Tilson’s investment performance improve.

“Whitney is such a big-hearted donor to causes that I care about that I am writing this open letter for him to try to get him to cover his short now,” Hastings wrote. “My desire is to increase his odds of making money next year so he can donate even more to the charter public schools that we both think are important to our country’s future.”

-- Tom Petruno

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Photo: Netflix CEO Reed Hastings. Credit: Paul Sakuma / Associated Press

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