Netflix: Great Company, Bad Investment

The following commentary is from an investment professional with Clear Harbor Asset Management who is a participant in TheStreet's expert contributor program.

NEW YORK ( TheStreet) -- Last year was painful for Netflix ( NFLX) shareholders, and 2012 isn't shaping up very well either. Last summer, shares of the online video company traded mostly over $250, reaching the $300-mark at one point. Less than a year later, the stock has lost well over half its value, trading below $100 despite a healthy gain for major stock indices during that time-frame. The latest selloff, in response to its first-quarter earnings release on Monday afternoon, sent the price below $90.

Not surprisingly, Netflix doesn't appear to be encouraging much participation in its annual shareholders' meeting, which is scheduled to take place on Friday, June 1 at the company's headquarters in Los Gatos, Calif.

Netflix

The date and location can be found in the company's proxy statement, a document required by law that can be accessed on its web site. However, there's no mention of it under "Upcoming Events" on the "Investor Events" page on its site. Netflix spokesman Steve Swasey said the company, which fashions itself a leader in online media, will not webcast the meeting this year the way it does earnings calls. He declined to comment on whether there will be a webcast in the future.

Meanwhile, the date and the time of the meeting seem deliberately scheduled to discourage attendance: 3 PM on an early summer Friday afternoon, leaving even locals who would like to be there facing the prospect of battling bad traffic jams as offices in Silicon Valley empty for the weekend. This reminds me of the White House press releases that come out late on Friday afternoons when the President doesn't want people to know about what is being announced.

Sure enough, Netflix's shareholders' meetings have been a non-event in past years, by all accounts, with only a handful of attendees present. Broadly speaking, corporate culture in Silicon Valley appears to treat principles of corporate governance and shareholder accountability with even more disdain than the rest of Corporate America, and perhaps holders of Netflix could care less about any of this. But as I have argued previously , this is not an attitude that encourages healthy, long-term performance, and based on their recent track record, Netflix shareholders may want to take heed.

If this company would make its meeting more accessible, participation would increase. Of course, that might encourage more support for two shareholder proposals that are up for a vote this year, both of which Netflix's board of directors -- led by Chairman Reed Hastings, who doubles as CEO --oppose.

One would require directors to be elected on an annual basis instead of granting them multi-year terms based on their classification. The other would allow shareholders controlling at least one-tenth of the company's voting power to call a special meeting of shareholders to vote on matters (and perhaps they could schedule it at a more convenient time and place than Netflix has chosen for its annual meeting).

The company's board recommends that shareholders vote against both proposals, even though both are well-aligned with widely accepted practices for good corporate governance. I'm guessing that neither proposal has a prayer of adoption, although you never know. Citigroup ( C) shareholders surprised many by voting against the investment bank's compensation practices at its annual meeting last week. The so-called "say on pay" vote, which public companies are now required to hold by law, was an embarrassing rebuke to the company's CEO Vikram Pandit and a rare display of shareholders flexing their muscles.

Netflix's brand did take a hit last year in response to the company's poorly executed pricing change, but it remains far more popular than Wall Street banks that were bailed out of financial ruin by U.S. taxpayers. That said, maybe we're on the cusp of an era of generally increasing shareholder activism. Lord knows many of us who have been observing public corporations in action for a while think such a development is long overdue.

I'm not a Netflix shareholder and have no interest in becoming one. I have, however, written extensively about the company as a journalist, even publishing a story with Dow Jones Newswires on Sept. 29, 2010 laying out the case that the stock was overvalued at over $140. Back then, Netflix had all the trademarks of a momentum stock heading for a crash -- prolific media attention, a towering valuation, an outsized short interest, insider stock sales... the list goes on.

Nonetheless, I thought it was a great company back then, and I still do today. Netflix is a start-up tech company that vanquished video rental stores, replaced them with mail-order DVD rentals and forced open the trail for premium online video -- a service that consumers clearly want and will inevitably get in full, even though the traditional TV business is dragging its feet to protect its business model.

Time Warner ( TWX) CEO Jeff Bewkes had it right when he famously compared Netflix to the "Albanian army" trying to take over the world. Netflix may wind up losing the battle with media superpowers like Time Warner and Comcast ( CMCSA), but it's winning hearts and minds and forcing progress on entrenched interests.

Netflix's strategy has always been fraught with risk, and it was bad form for Hastings to respond publicly to a short-seller in December of 2010 . By advising short-sellers -- who were correct in their analysis, albeit a bit early -- to cover their positions on his company, Hastings gave the impression of a CEO that was overly focused on his stock price, which ultimately dropped precipitously and damaged his credibility.

Nonetheless, I admire Hastings for his business achievements. I'm a subscriber, and I can't wait for the new season of Arrested Development- -- one of the funniest shows ever made -- to come out on Netflix. It was a travesty when News Corp's ( NWS) Fox Broadcasting canceled that show, and I hope Netflix and other online video distributors are able to produce original video content that competes with the traditional media conglomerates.

As for investing, I'll remain on the sidelines -- at least until Netflix embraces more accountability to shareholders and its CEO stops responding to short-sellers with bad advice.

Follow me on Twitter @NatWorden.

Disclosures: Worden and/or his firm hold positions in C and CMCSA, but not in the other stocks mentioned in this story.

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