Has Netflix Finally Gotten Something Right?

This morning we saw news from Netflix NFLX separating its streaming and rental DVD business, and we also got an apology from CEO Reed Hastings apologizing for errors he has made in recent weeks. In a letter to its shareholders, Netflix said, “We know our decision to split our services has upset many of our subscribers, which we don't take lightly, but we believe this split will help us make our services better for subscribers and shareholders for years to come.” We've recently seen the company raise its pricing models, which got a lot of customers up in arms, and forced the company to lower its subscription estimates late last week. That caused the stock to plunge, as the company said it now sees 21.8 million streaming subscribers and 14.2 million DVD subscribers. The company originally saw 22 million streaming subscribers and 15 million DVD subscribers. It has been a long few months for Netflix shareholders, and just this morning, Goldman Sachs cut its price target to $270. In yesterday's apology, Hastings wrote: "It is clear from the feedback over the past two months that many members felt we lacked respect and humility in the way we announced the separation of DVD and streaming, and the price changes. That was certainly not our intent, and I offer my sincere apology." He also goes on to note that the company is going to be separating its businesses, with streaming and DVDs being two separate companies. "So we realized that streaming and DVD by mail are becoming two quite different businesses, with very different cost structures, different benefits that need to be marketed differently, and we need to let each grow and operate independently. It's hard for me to write this after over 10 years of mailing DVDs with pride, but we think it is necessary and best: In a few weeks, we will rename our DVD by mail service to “Qwikster”." What Hastings also mentioned is that Qwikster is now getting into the video game rental game, which is something customers have long asked for. As it defends itself against Amazon AMZN, Coinstar CSTR and other services, Netflix has needed video games to differentiate itself. It now finally has this. The past few months for Netflix have been extremely trying for both shareholders, and end-users, with constant negative press reports, especially about the pricing change. Shares have fallen from a high of around $300 per share in early July to the current $159 that shares are currently trading at. That is a 50% drop in just a few short months, enough to kill anyone's year. As Netflix tries to regain the trust of shareholders and customers alike, splitting the company in two and adding gaming rentals is a start. There have been some early complainers about the move to split the company, and they may well be proven correct in the long run. However, Netflix's duty is to shareholders, as well as customers, and Hastings and his team believe that the growth is in streaming, and in order to generate higher returns for shareholders, the board decided this was the best route. Netflix will have to do a lot to regain its once high-flying status, and it may never happen again, but this is certainly a good start. As Hastings said in his note, "Both the Qwikster and Netflix teams will work hard to regain your trust. We know it will not be overnight. Actions speak louder than words. But words help people to understand actions." We're waiting Reed. This seems like a smart first step. ACTION ITEMS:

Bullish:
Traders who believe that Netflix has gotten its act together might want to consider the following trades:

• The growth is in streaming, so traders may want to initiate positions in Netflix before the split happens , as money managers move into the name to position their portfolios for growth.

Bearish:
Traders who believe that Netflix is doomed may consider alternate positions:

• Amazon is still intent on killing Netflix, and it does not have this public relations mess on its hands. Amazon is a bigger company and has more resources. Traders who believe Amazon will succeed could go long Amazon and short Netflix.

• GameStop GME is offering a streaming service for video games, which could prove more successful then Netflix's current plans.
  
  

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