Netflix Tops Record as Hastings Recovers From 2011 Gaffes

Netflix Inc. (SPX) eclipsed its all-time high set in mid-2011, capping a two-year recovery for Chief Executive Officer Reed Hastings from marketing missteps that angered customers and cratered the stock.

Netflix, which has more than tripled this year to lead the Standard & Poor’s 500 Index, gained 6.4 percent to $313.06 at the close in New York. The previous closing high of $298.73 was set on July 13, 2011. A day earlier, Netflix had raised prices for users who wanted DVDs and streaming -- triggering a backlash that cost the service 800,000 subscribers.

Hastings has won customers with exclusive deals for movies from Walt Disney Co. (DIS) and DreamWorks Animation SKG Inc. (DWA), and kept them hooked with original shows that have drawn 14 Emmy nominations, including best drama for the political thriller “House of Cards.” The company this week begins offering streaming on Virgin Media cable systems in the U.K., the first time Netflix has been integrated with a major pay-TV provider.

“That the cable industry might consider adding Netflix is a big change in direction,” said Daniel Ernst, an analyst with Hudson Square Research who recommends the stock.

The deal with Virgin Media opens a new avenue for Netflix to expand through alliances with pay-TV distributors. Virgin is part of cable billionaire John Malone’s Liberty Global Plc, which has almost 22 million video subscribers worldwide. The accord challenges the view that growth in streaming comes at the expense of cable and satellite services.

Photographer: Victor J. Blue/Bloomberg

Netflix Inc. announced a deal to offer its service on Virgin Media cable systems in the U.K., marking the first time the product is integrated by a major pay-TV provider. Close

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Photographer: Victor J. Blue/Bloomberg

Netflix Inc. announced a deal to offer its service on Virgin Media cable systems in the U.K., marking the first time the product is integrated by a major pay-TV provider.

Malone’s Validation

“Since John Malone owns Virgin Media, the market might consider the move a major industry validation,” Ernst said in an e-mail. Malone is also the largest shareholder in Charter Communications Inc., with 3.9 million U.S. video subscribers

Global domination was far from investors’ minds after the 2011 pricing change and Hastings’s plan to cleave the older DVD-by-mail business into a separate company called Qwikster. Customers revolted, and Netflix lost 800,000 accounts in one quarter, leading to its biggest stock drop in seven years. While the Qwikster plan was scrapped, the shares kept falling, reaching a low of $53.80 in September 2012, an 82 percent drop.

Since then, Los Gatos, California-based Netflix has clawed its way back. Hastings held to the price increase while adding new, exclusive programming and signing deals that will bring “Star Wars” and Marvel movies from Disney. In addition to “House of Cards,” a show starring Kevin Spacey that made its debut on Feb. 1, Netflix introduced “Hemlock Grove” in April, a revival of the former Fox comedy “Arrested Development” in May, and women’s prison drama “Orange Is the New Black” from Lions Gate Entertainment Corp. (LGF) in July.

Regaining Subscribers

The new programs and output deals have helped Hastings to win back subscribers and add new ones. At its current stock price, Netflix has a market value of $18.4 billion. With 38 million subscribers in 40 countries, the company accounts for almost a third of all Internet traffic in North America.

“House of Cards” collected nine nominations for the Emmy Awards, which take place on Sept. 22. “Arrested Development” received three, and “Hemlock Grove” got two.

Agreements for exclusive subscription streaming rights to first-run films from Disney and Weinstein Co. take effect in 2016. An accord with DreamWorks Animation starts with “Turbo,” which was released in theaters in July.

From an investing standpoint, Carl Icahn has been a big winner. The value of his stake has increased more than fivefold to about $1.73 billion in less than a year, based on regulatory filings and data compiled by Bloomberg.

Icahn Stake

“We still own it, we haven’t sold a share,” Icahn, 77, said yesterday in a Bloomberg TV interview. “I still think it’s a good buy, but certainly it’s not what it was when it was $58.”

Icahn paid more than $300 million for stocks and options that he exercised in the second half of 2012, acquiring 5.54 million Netflix shares, or about a 9.4 percent stake, based on data compiled by Bloomberg.

While investors have cheered Hastings, the CEO said it will take three years to fully regain the confidence of customers.

“It wouldn’t take much to have the issue flare up again or for us to lose trust,” Hastings said on a Jan. 23 conference call with analysts. “We’ve still got a year and a half of probation.”

Further Gains?

Most analysts don’t recommend buying the stock, which trades at 229 times earnings, third-highest in the S&P 500. Twenty-eight of the 36 analysts tracked by Bloomberg say sell or hold the stock, while eight say buy.

Among the potential drawbacks: growing liabilities for movies and TV shows, negative free cash flow as the company invests in its expansion, and the challenge of reaching Hastings’s goal of as many as 90 million U.S. subscribers, about three times as many as Time Warner Inc.’s HBO.

Netflix has a problem with 25-year-olds using their parents’ accounts to watch, rather than subscribing on their own, according to Richard Tullo, an analyst with Albert Fried & Co. who suggests investors sell.

“Ultimately, people are very excited by the stock and by the potential of the company, but at $290 a share we’re talking tulips,” Tullo said on Aug. 26. “It’s not an investment any more, it’s speculation.”

To contact the reporters on this story: Andy Fixmer in Los Angeles at afixmer@bloomberg.net; Cliff Edwards in San Francisco at cedwards28@bloomberg.net

To contact the editor responsible for this story: Anthony Palazzo at apalazzo@bloomberg.net

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