This Was Netflix's Biggest Blunder


Today's obviously a good day for Netflix (NAS: NFLX) investors.

Shares of the video service provider are soaring after a blowout quarter. Netflix easily topped Wall Street's watered-down projections.

The sky isn't falling on Netflix, after all. The total unique global count of couch potatoes now stands at a record 26.2 million subscribers.

It's against this euphoric backdrop with Netflix's stock racing back into the triple digits that I want to revisit the flick flicker's biggest mistake.

It wasn't Qwikster. That brand will go down in the annals of business history as one of its greatest punch lines, but at least Netflix had the intelligence to nix it three weeks after it was announced. Not a single subscriber had to move to the distinct website for DVD rentals.

Netflix's biggest mistake wasn't the summertime price hike either. It may have been what alienated many of its customers during the third quarter, but it was necessary. Studios weren't going to dilute their content by continuing to give it away as part of a freebie given to DVD subscribers. The $7.99-a-month price point works, and now Netflix can say that it has a whopping 23.5 million premium streaming subscribers around the world.

So where did Netflix blow it?

Well, how about Nov. 21, when Netflix announced the completion of $400 million in financing through a stock sale and a convertible offering?

It was on that day when Netflix agreed to hand over 2.86 million freshly minted shares at $70 apiece to mutual fund giant T. Rowe Price (NAS: TROW) . The move helped raise $200 million. Another $200 million was drummed up through the sale of zero-coupon convertible notes with an initial conversion price of roughly $85.80 a share.

The move was ridiculed at the time, and rightfully so. The same company that had spent roughly $200 million through the first nine months of 2011 buying back less than a million shares for $200 million at an average price of nearly $222 a share was now diluting investors to the tune of 5 million shares to raise $400 million!

Buy high, sell low?

However, now that the stock has soared roughly 75% since bottoming out around the time that the secondary offerings were completed, it's clear that Netflix picked the worst possible time to print new shares -- just as it picked the worst possible time earlier in the year to retire some shares.

Today's a day for cheering, but a little jeering wouldn't hurt.

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At the time thisarticle was published Longtime Fool contributor Rick Munarriz has been a Netflix subscriber and shareholder since 2002. He does not own shares in any of the other stocks in this story. Rick is also part of theRule Breakersnewsletter research team, seeking out tomorrow's ultimate growth stocks a day early.The Motley Fool owns shares of T. Rowe Price Group.Motley Fool newsletter serviceshave recommended buying shares of Netflix. 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.

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