Netflix's Truly Terrible Trade
History is full of bad trades, from the UBS (NYS: UBS) rogue trader that lost $2.3 billion to Long-Term Capital Management's failed arbitrage plays. While Netflix's (NAS: NFLX) badly timed repurchase program and stock offering aren't as bad, that doesn't make it sting any less for shareholders.
Netflix has been repurchasing its shares for years, but the most recent repurchase program was authorized in June 2010 for $300 million after the previous batch had been completed. With 2011 winding down, it's the time of year for people to start looking back and assessing how the year has treated them. How have Netflix's share repurchases worked out thus far?
Approximate Transaction Total
May - July
Source: 10-Q quarterly filings, actual transaction totals may differ slightly because of transaction costs.
Netflix's quarterly filings only go up through September and through the end of that month, the company has repurchased almost 900,000 shares at an average price of nearly $222 for just under $200 million. While certainly no company tries to time its repurchases with trader-esque precision, stock buybacks do convey the message that management believes the stock is undervalued to an extent.
The blue line represents the dollar value of Netflix's repurchases each quarter. Since hitting an all-time intraday high in July, shares have seen a wild ride, and yesterday's closing price of $70.45 represents a jaw-dropping decline of more than 75%, while competition heats up from Amazon.com's (NAS: AMZN) Prime Instant Video and subscribers jump ship en masse in response to the price hike and PR fumble. Coinstar (NAS: CSTR) didn't take notes from the episode since it followed up with a price hike of its own at its Redbox DVD kiosks.
Just yesterday, Netflix has announced that it's raising $400 million in capital because ... well why not? The official response that Fool Anders Bylund got was, "We don't think we need the money, but it's nice to have more money than you need." The stock portion of the offering involves selling 2.8 million shares at $70.
Buying at $222 and selling at $70 is a pretty rough trade. While Netflix couldn't have seen its massive pullback coming, its repurchase program has seen better days. As much as I love Arrested Development, I'm relieved to be sitting on the sidelines on this one.
At the time this article was published Fool contributorEvan Niuowns shares of Amazon.com, but he holds no other position in any company mentioned.Click hereto see his holdings and a short bio.Motley Fool newsletter serviceshave recommended buying shares of Netflix and Amazon.com. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.