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Buy Netflix? A Bull vs. Bear Debate With a Cautionary Tale

Jeff Macke

Netflix (NFLX) hasn't "disappointed" investors over the last four months. Apple (AAPL) disappointed, as did 3M (MMM). IBM (IBM) came in a little light. Even Amazon (AMZN), with earnings declining 73% on worse than expected revenues and a stock drop of 10%, is still within a standard deviation or two of what can be happen during earnings season.

What Netflix has done to shareholders is something entirely different. Netflix chained investors to the back fender of the company car and floored it. A price increase announced in July and an inexplicable plan to separate the DVD and streaming businesses in September, amongst other failings, had combined to drive NFLX stock down 60%.

All of which was prior to Monday's horror show of an earnings release. You can read the details almost anywhere. For our purposes let's just say it was a quarter that bespoke a company completely out of control of its own business and clueless as to how to right the ship. The market responded by taking yet another 36% out of the stock on more than 3x average volume.

All of which is in rearview. All investors should be concerned with now is whether or not the selling is "overdone" as they say on Wall Street. My co-host Matt Nesto and I explored the issue with an old fashioned Bull versus Bear debate.

Nesto contends that the selling in Netflix is overdone. "Did it deserve to be a 300 dollars (a share)? Probably not. Does it deserve to be 75-dollars? Probably not." Supporting Nesto is that the stock dropped by over a third on huge volume in one day. It could be argued that any investor who's going to sell finally gave up the ghost on Tuesday.

Nesto also gives the company's CEO Reed Hastings credit for being a leader "who tried to do something bold, failed, identified it, accepted it, embraced it quickly, and backed away from it." Many an executive has ridden a decision into the ground or ignored problems in the core business.

I'm slightly less generous. While there's something to be said for Hastings' willingness to experiment and recognize when an idea is a lemon, that's not good enough and hardly solves the problem. Netflix's core DVD business has no place in the world of streaming. While both streaming and DVDs are forms of distributing content, that's more or less where the similarity ends.

If Netflix can't transition to a profitable streaming model, the company dies alongside with DVDs themselves. Streaming is the future and has a whole different business model. Where DVD content is all distributed through the same channels, selling streams requires separate deals with studios and networks. Getting these deals done is absurdly expensive and Netflix is cash poor, having gone through hundreds of millions buying back stock at prices double or triple the current quote.

Netflix's advantage in competing for customers against companies like HBO, who gives away their stream free with subscription, was loyalty to the brand. Hastings' moves have done much to destroy the brand he spent more than a decade building.

From where I'm sitting, Netflix isn't a buy, sell or short. It's a cautionary tale executives will be whispering to one another the way campers tell ghost stories.

There's your bull and bear debate. It's time for you to weigh in. Netflix: buy, sell, or hold? Let us know in the space below.