What If Reed Hastings Is Right About Facebook?
Aug 15th 2012 9:12PM
Updated Aug 15th 2012 9:20PM
It's easy to kick a fallen icon when he's down.
Netflix (NAS: NFLX) CEO Reed Hastings revealed in an SEC filing last week that he had invested $1 million in Facebook (NAS: FB) . Acquiring nearly 48,000 shares at an average weighted price of $21 may seem opportunistic. This is the same company that went public at $38 just three months ago.
However, the more common reaction has been to ridicule his purchase.
"Hastings is a brilliant business leader but not such a genius when it comes to investing," writes my friend and fellow Fool Anders Bylund, ridiculing company share buybacks last year at much higher price points than where the battered video service stock rests today.
"Bear in mind, this guy also thought Qwikster was a great name," read our official Twitter feed two days ago. Poor Hastings. One cruel summer, and the former dot-com darling is a Wall Street punching bag.
I don't always agree with the guy, but I think he's right with last week's purchase. I'm not ashamed to say that, and I'll show you why.
Hastings knows Facebook
Only a handful of non-Facebook executives have the kind of access to the world's leading social-networking site that Hastings does. He sits on the Facebook board of directors, having joined last summer, just weeks before his own company's stock peaked ahead of its unfortunate missteps.
He knows the power of Facebook. It's been a big part of the viral nature of Netflix's streaming expansion success outside the United States, as international users can share their Netflix viewing choices with their Facebook friends.
Last September, Netflix began backing House bill H.R. 2471, accusing the Video Privacy Protection Act of keeping its domestic subscribers from sharing the same viral love of streaming celluloid on Facebook.
In short, he knows that good things happen when you scale to the size of Facebook. Why wouldn't he make a significant investment in the company?
Hastings knows consumers
Eyeing a Netflix stock chart over the past 13 months is scary stuff. Investors may have lost faith in both Hastings and Netflix, but consumers surely haven't. Netflix now claims 30.1 million subscribers, millions more than the company had a year earlier, when its stock peaked above $300.
Is Netflix as profitable as it used to be? No. Overseas expansion doesn't come cheap. Are the fundamentals the same? No. High-margin disc-based fans are inevitably moving on. Average revenue per user is on a gradual slide to $7.99 a month as Netflix becomes a service that is primarily consumed digitally.
However, apart from the poorly communicated rate tweak and the short-lived Qwikster disaster, Hastings has proved over time that he understands the way Internet users approach the medium.
Hastings knows the bears
A popular knock on last week's filing is that Hastings is buying ahead of the lockup expirations. Many employees and early investors will soon be able to start selling their shares, and that can be a brutal event, as Angie's List (NAS: ANGI) investors discovered yesterday. The premium referral website was clobbered as its lockup expirations expired.
Shares of Facebook and restaurant-reviews hub Yelp (NYS: YELP) also slipped on Tuesday, weakened merely on the notion of the pending expirations awaiting the once buzzworthy debutantes.
Some longtime Facebook investors can begin selling as soon as Thursday, though substantial expirations also come in November and next May.
The problem with playing lockup expirations is that nervous investors also do some selling ahead of the news. Some stocks coast along just fine past their lockup periods. Some potential sellers may also be too proud, loyal, or perhaps even optimistic to unload their positions at current prices.
Hastings knows the future
Tomorrow doesn't have to be a scary place to be if you're Facebook. Even jaded analysts see revenue growth continuing and profit margins expanding. If we go all the way out to 2015, Wall Street's profit target for Facebook is a hearty $0.85 a share, a robust 42% increase over the $0.60 analysts see in 2014.
Investors can get burned by looking too far ahead, but they can also miss golden buying opportunities by overestimating the gravity of today.
Hastings isn't a day trader. He still holds the stake he purchased in Microsoft (NAS: MSFT) shortly after being tapped for the software giant's board a couple of years ago. That investment has gone on to appreciate mildly. Obviously, his position in Facebook will be far more volatile than his stake in Mr. Softy, but let's all agree to revisit Facebook's stock price next summer and then the summer after that.
Hastings isn't a punch line. If anything, he may be gearing up to have the last laugh.
There's also a new premium report on Netflix detailing the opportunities and challenges in store for its shareholders. The report includes a full year of updates, so time's ticking. Check it out now, too.
The article What If Reed Hastings Is Right About Facebook? originally appeared on Fool.com.The Motley Fool owns shares of Microsoft, Facebook, and Netflix. Motley Fool newsletter services have recommended buying shares of Netflix, Facebook, and Microsoft and creating a synthetic covered call position in Microsoft. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.Longtime Fool contributor Rick Munarriz calls them as he sees them. He owns shares of Netflix and is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Motley Fool has a disclosure policy.
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