Insider Trading Report: Netflix $NFLX

Since going public in 2002, Netflix (NASDAQ: NFLX) has become the go-to media service for couch potatoes everywhere, as the company offers an extensive library of deliverable DVDs and streaming shows.  By the middle of last year, the company announced that it had reached over 26 million subscribers worldwide, and shares of NFLX subsequently hit an all-time high of over $300 a share.  What happened next will go down in infamy as one of the biggest corporate blunders of the past decade.  Perhaps it was hubris or a miscalculated risk, but the company decided to announce that it would be separating its rental and streaming services, with the latter taking the grotesque name of Qwikster.

Netflix, Inc. (NASDAQ:NFLX)

Almost as fast as investors could say lickety-split, the company reversed its decision, but still decided to employ massive price hikes of more than 60 percent for some customers.  Over the past year, Netflix has been one of the market’s biggest losers, as its shares have lost over 70 percent, shaving almost $3 billion in market capitalization in the process.  At the same time, many of the company’s insiders sold their shares in enormous chunks, most notably CEO Reed Hastings.  In the past month, however, a couple of insiders have displayed a newfound optimism in NFLX, which may be because shares are trading at very cheap earnings multiples.  Either way, investors are wise to take note of the insider behavior surrounding Netflix.  Empirical studies have proven, those who mimic or ‘monkey’ insiders have outperformed the market by 7 percent over a 12-month period.  Below are accounts of four of the most active Netflix insiders.

C. Jay Hoag: Since 1999, Hoag has served as an Independent Director to the company, and is also a board member at Zillow (Z) and Electronic Arts (EA). Over the past month, the only company Hoag has bought has been Netflix, as he purchased 77,988 shares for a total value of $5.6 million.  Since his purchases on May 10th, NFLX has lost 3.4 percent.  Two weeks before Hoag’s purchase, the company reported better than expected Q1 revenue and earnings on the shoulders of 1.7 million new streaming customers.  On the negative side, the company also reported that less than half of its customers consisted of DVD subscribers, which was a disappointment in the eyes of many analysts.

N. Richard Barton: Another bullish insider, Barton is the co-founder of Netflix and currently serves on the company’s Board of Directors.  Having worked as CEO between 2004 and 2010, Barton presided over NFLX during its heyday.  At the end of his service, he sold the majority of his holdings in the company, but has recently purchased 6,000 shares at $85.05 a piece.  It is notable that he made this purchase on the heels of the company’s mostly upbeat Q1 earnings report.  Since his purchase, he has been less fortunate then Hoag, as NFLX has lost almost 19 percent.  It remains to be seen if Barton was purchasing the stock because of strong earnings, undervaluation, or a future business direction unbeknownst to individual investors, but it will be important to monitor his transactions in the future.

Reed Hastings: The current CEO of Netflix, Reed Hastings founded the company with Barton a little more than a decade ago.  Unlike his counterpart, Hastings has been nothing but a bear on NFLX over the past year.  Since May of 2011, he has sold 191,500 shares at a total market value north of $36 million.  While it may be expected that much of this would have come during the Qwikster debacle, it actually didn’t.  Around 40 percent of these sales occurred in February of this year, as the CEO used stock options to buy 76,500 shares at a price of $1.50 each and subsequently sell them at $111.44 per share; Hastings realized a profit $8.4 million on this single transaction.  Due to the company’s worse-than-expected performance in 2011, Hastings’ stock option allowance was cut in half, though his salary of $500,000 was kept constant.  Nonetheless, an investment return of 16 times that of anyone’s salary is always a good payday.

A. Theodore Sarandos: Nicknamed the Hollywood-man, Sarandos is the company’s Chief Content Officer, and is responsible for making sure that the meat of Netflix’s content is always in existence.  Unfortunately for him, the company announced last year that they had failed to reach a re-up with Starz, resulting in a content loss of almost 10 percent.  In recent months, it has been rumored that Sarandos is making a play to produce 4 to 5 original ‘only on Netflix’ shows each year.  This past February, in fact, marked the release of the company’s first original series, a comedic mobster tale titled ‘Lilyhammer’.  With the entire first season released on one day, the series has received modest reviews, though Netflix has yet to review actual viewer data.  Looking at his insider activity, Sarandos sold 7,410 shares of NFLX last August for a total market value of $1.7 million.  The entirety of this transaction was a result of the CCO’s stock options, which were used to buy NFLX at a price between $40 and $50 a share, which were subsequently sold at $230 each.  Altogether, Sarandos made over $1 million on this transaction, which was just larger than his 2011 salary.

While insider sentiment remains mixed, it is notable that the company looks to be mildly attractive at the moment, at least from an analytical standpoint.  With a 3-year average revenue growth of 32.9 percent, NFLX dominates the industry (7.5%) and DISH Network (NASDAQ: DISH) at 6.5%.  However, its revenues aren’t growing as quickly as newer competitors like Redbox-owner Coinstar (NASDAQ: CSTR) at 34.3%, and Amazon (NASDAQ: AMZN) at 35.9%.  More importantly, though, Netflix has been translating this growth to its bottom-line, as yearly earnings have grown 46.6 percent over this same time period.

From a valuation standpoint, it seems that investors may be caught a sea of negativity surrounding NFLX, as the stock’s P/E ratio (23.7X) is below the industry average (29.1X), and its own 10-year historical average (53.3X).  Intriguingly, the company’s PEG ratio is 1.4, which is an indication that when growth is factored into the equation, earnings are fairly valued.  From a cash standpoint, Netflix did grow its free cash flow by 55 percent last year, though this growth is already factored into NFLX’s share price.  In fact, the company’s P/CF ratio (17.4X) is above the industry average (12.7X), its own 10-year historical average (11.55X), and competitors DISH (4.9X) and CSTR (4.5X).  All in all, investors would be wise to keep an eye out for any further insider transactions surrounding Netflix, as it may give a clearer picture on what the future may hold. Hedge Fund managers Philippe Laffont, John Burbank, and Christopher Lord initiated large new positions in Netflix during the first quarter. Overall hedge fund activity was bullish in Netflix.