Fast Company

A Tale Of Two Netflix: Has The Streaming Giant Bounced Back After Qwikster?

Wall Street thought Reed Hastings was an idiot. Now Wall Street thinks Reed Hastings is a genius. Does Wall Street know anything about Netflix?

In the fall of 2011, Saturday Night Live's Jason Sudeikis skewered Netflix CEO Reed Hastings. In one skit, Sudeikis-as-Hastings announces 17 possible name changes to his company, including the delightful Nutqwakflikster. Sudeikis also mocks Hastings's attire: "We know it's off-putting to see the CEO of a company rocking a goatee and teal shirt. But trust us . . . we know what we're doing."

The mockery came on the heels of Hastings's worst decision ever and was the low point on the roller-coaster of reactions Hastings has provoked. Just one year after being heralded as Fortune magazine's "Businessperson of the Year," the CEO decided that Netflix would be better off if it split itself in two; the streaming content side would be called Netflix, and the DVD side would be called Qwikster. The result? The aforementioned scorn, the departure of some 800,000 Netflix members, the press demanding Hastings's head, and the very tangible punishment at the hands of Wall Street: The stock plummeted from $298 to a low of $53 last September. Susquehanna Financial Group analyst Vasily Karasyov described this as "nuclear winter" for Netflix.

Fast forward to 2013. Now it's Hastings who's got the big grin, as he explains in a CNBC interview that Netflix "grew by nearly 10 million streaming members last year." He has ditched all traces of surfer attire for a more professorial combo of black jacket and dark blue sweater. Behind him is an enormous poster for House of Cards, one example (along with the likes of Arrested Development and Hemlock Grove) of the original programming Netflix is now backing as a way to make itself more valuable to subscribers. That move was generating huge buzz for Netflix even before the company announced what some analysts called a "blowout" fourth-quarter earnings report: Netflix had garnered 3 million new global subscribers; for the first time ever, it scored $1 billion in quarterly revenue. The media are ecstatic. Outlets that lambasted Hastings in 2011 now call him a visionary changing the way we consume entertainment. (Says The Huffington Post: "With House of Cards, Netflix begins the future of TV.") And Wall Street is wild too: For the first time since Qwikster, Netflix trades above $200, making it one of the best performing stocks on the S&P 500. BTIG analyst Rich Greenfield declared, "Netflix is now likely the most-watched cable network, essentially in line with the Disney Channel."

Netflix, of course, is not a cable network. But the confusion just illustrates the difficulty Wall Street has getting an accurate handle on the company. Netflix makes its money from subscription fees, with most of its 36 million U.S. subscribers paying $7.99 a month for access to its enormous library of streaming movies and TV shows. Acquiring and keeping that content is getting more expensive as Hollywood studios ratchet up the rent; while Netflix has allowed some deals to expire, it has committed to spend at least $5 billion over the next five years to license TV shows and movies, including Disney's animated hits. Original programming is expensive too: The 13 episodes of House of Cards reportedly cost $100 million.

How big does Netflix need to get to justify that spending? The company earned just $3 million on those $1 billion in revenue--not exactly a high margin. Moody's analyst Neil Begley says Netflix needs to sustain 40 million U.S. streaming subscribers to become "a very solid, sound business." Hastings expects to eventually have up to 90 million U.S. subscribers, given the 100 million households that now pay around $90 a month for cable. Netflix costs a fraction of that and arguably provides a comparable experience. But, not surprisingly, some analysts think he's dreaming. Which is why at least one brokerage--Bank of America Merrill Lynch--gave Netflix an "underperform" in April. In other words, Wall Street may not be done messing around with Netflix's stock, which one source describes as "a cat toy [that] gets batted back and forth between the shorts and the longs."

So which is it? Is this the best of companies or the worst of companies? Truth be told, Netflix is one of those innovative organizations that comes along every so often and completely stumps the Street. It's the leader of a category that will radically change entertainment . . . somehow, some way, some day. "No one really knows the economics of the streaming business," explains Harvard Business School professor Suraj Srinivasan. It is truly unclear who exactly are Netflix's stiffest competitors; analysts have cited Sky TV, DirecTV, Amazon, Apple TV, Hulu, Redbox, and cable networks including HBO as threats. Srinivasan chalks the confusion up to the fact that Netflix is like Amazon back in the early 2000s--a pioneering company that is extremely difficult to compare with existing models.

"The technology is changing, and there are lots of moving parts," says Srinivasan, "so it's about strategy and good execution--and then just getting pretty lucky." Which brings us back to Hastings, and a truth that's uncomfortable for both the press and the Street: It's terribly hard to know if a company as groundbreaking as Netflix will succeed in the long run. A lot depends on the CEO, who has certainly proven that he is nothing like the laughingstock Sudeikis made him on Saturday Night Live.

Illustration by Noelia Lozano

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