Over the past year or so, Netflix has received a serious bashing from Wall Street as the company continues to re-invent its business and flesh out internationally. From a high of around $300 back in the summer of 2011, the stock has fallen more than 75% to around $58 today. This past Monday, the stock fell a whopping 6% based on more concerns about the video subscription service’s ability to make money and retain customers as it grapples with higher licensing costs and tougher competition (Grim analyst report delivers latest hit to Netflix, Yahoo! Finance).
While the stock may have been indeed over-valued at its peak, here are some of the reasons why I still believe in the company, both as an investor and a consumer (note: I currently do not own any shares of Netflix).
1) Strong CEO – Reed Hastings is a boss. Intelligent, intuitive leader with strong views on management and organizational growth in addition to innovation. Two moves particularly stand out to me that prove he’s a great CEO. #1: He was willing to cannibalize his own industry-leading, high-margin, business of traditional DVD mailings in order to capitalize on and stay in the forefront of the digital distribution revolution. Many a strong company have sunk into complacency when they carve out an industry leading position in a particular business only to fall victim to the changing times (see: Sears, Blockbuster, Blackberry, potentially Microsoft) with their inability to innovate. Hastings saw that streaming was the future of the content delivery business and took huge hits in the media and in the company’s stock price to adjust ship and focus his R+D to online delivery services. This fearlessness cannot be quantified or reflected in annual reports but it is the reason why companies are successful for as long as they are. #2: Reed is not afraid to take chances on his business and own up to his mistakes when those chances fail. When Netflix split their DVD business from their streaming business into two companies (and subsequently, charged for both services), the public backlash was tremendous. Everyone makes mistakes and even really smart people make really stupid mistakes, CEO or not. I think a true testament to leadership is not the ability to avoid mistakes but rather the ability to take risks and then to recognize and rectify mistakes when they happen. Qwikster is now dead and may it never rise from the dead like Resident Evil, but Reed Knows He Messed Up. And he wasn’t so arrogant or out-of-touch to not change things.
Side tangent: Other strong media CEOs that I like include Les Moonves (CBS), David Zaslav (Discovery Communications), Jeffrey Katzenberg (Dreamworks Animation), Jeff Bewkes (Time Warner), Bob Iger (Disney), Jeff Bezos (Amazon) and Brian Roberts (Comcast).
2) Strong company culture. Much has been written about Netflix’s company culture (which again, is derivative from the strength of top-down organizational management that starts with the CEO) so I won’t bother to reiterate it here (but you can read about it here, here or here). All I know is that the most effective armies are staffed with the strongest soldiers who will defend their country (or company) to the death. Obviously an overstatement to compare Netflix to a military unit, but the comparisons are certainly there.
4) The “verb” test. Once a company name becomes a verb in everyday use, it’s going to be around for a while. See: Google, Facebook, Twitter (tweet), Yelp (to be determined, but I have strong faith in this company).