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Summary:

As the bloodbath for Netflix (NSDQ: NFLX) (NFLX) investors carries on, perhaps the CEO could boost a little confidence in the company if he…

Netflix CEO Reed Hastings
photo: Getty Images / Jason Kempin

As the bloodbath for Netflix (NSDQ: NFLX) (NFLX) investors carries on, perhaps the CEO could boost a little confidence in the company if he would stop selling his own shares.

CEO Reed Hastings has exercised buy options, then sold in equal amounts, for about 5,000 Netflix shares weekly since the beginning of the year, according to SEC filings compiled by Insider-Monitor.com. In the past, this sort of scheduled selling was an innocuous personal financial plan for Hastings, and a nice way to avoid the suspicion of acting on insider-only knowledge. But with Netflix shares down more than 70 percent since August, Hastings’ sales now simply mark an exasperating contrast of the money he’s making while common shareholders lose big.

Netflix Stock Chart by YCharts.
Netflix Stock Chart

Netflix Stock Chart by YCharts

The records indicate that Hastings’ apparently scheduled buying and selling this year come from exercising options to get Netflix shares for $1.50 each. So even when Netflix common shareholders were down big points on a day – and there have been several 10 percent-plus short-term drops recently – Hastings booked gains in the thousands of percentages. On Oct. 6, for example, he spent $7,500 and sold for $598,500. In the good old days (aka, three months ago), Hastings spent the same amount in a day and sold for $1.32 million.

Yes, Hastings’ overall net worth plummeted in recent months with the price of Netflix’s common shares, as Netflix’s market cap shriveled. But he hasn’t been paying anything near what everyone else did to get there.

Hastings’ gains particularly rankle in light of the company’s botched share repurchase program that helped ramp up the share price in the first place. Stock buybacks are supposed to be reassuring to shareholders, as they typically indicate that management believes the price will rise. But the $39.6 million repurchase in the third quarter instead demonstrated Netflix’s colossal overestimation of its own worth. Netflix paid an average $218 each for those third quarter shares. They were going for about $81.75 on Thursday and haven’t traded for more than two-thirds of that purchase price since September.

Several investment analysts now make reasonable (although debatable) arguments that Netflix shares have been oversold. That would make today a particularly good time for the company to raise investor confidence by buying back more shares. But that opportunity was eaten away in the share purchases when the share price was on a huge rise.

Netflix Cash and Equivalents Chart by YCharts
Netflix Cash and Equivalents Chart

Netflix Cash and Equivalents Chart by YCharts

Netflix needs that cash now to pay its bills for expansion, including content fees that will be double what they were in 2011. Those rising costs, paired with the loss of tens of thousands of customers last quarter amid a price hike and marketing mayhem, won’t leave any excess to spin out for shareholder reassurances.

In reality, Hastings can only stop exercising his options for cheap Netflix shares if he wants to permanently say goodbye to millions of dollars. He’s free, of course, to exercise the options and not sell. According to Netflix year-end proxy, Hastings held 266,500 $1.50 stock options at Dec. 31, 2010, all of which will all expire by Feb. 27, 2012. (He, of course, has plenty more options to exercise, starting at $9.43 a share, but the next expiration date isn’t until July 2013.) By early October, he had reported exercising his $1.50 options to buy 190,000 shares. It would have been a nice gesture of faith if he had held on to some of those.

Dee Gill is an editor for the YCharts Pro Investor Service which includes professional stock charts, stock ratings and portfolio strategies. Gill has written market analyses for *Dow Jones* News, about social issues for The Economist and *Time*, as well as for *The New York Times* and *The Wall Street Journal*.

This article originally appeared in YCharts.

  1. He earned the right to do that. I don’t think there would be a Netflix without him.

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    1. Very true.  It kinda feels like the CEO doesn’t think the company will be riding high again anytime soon, however.

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      1. I counted Hastings out once upon a time, it was a grievous error on my part – I don’t count him out until he’s six feet under or no longer in control of the company. I truly respect that man for what he has accomplished. He is a competitor, smart, and I suspect he will win more than lose in the future.

        As far as what this means – I think you’ll have more luck with tea leaves. It is just a personal choice for personal reasons – most all executives are aware that their trades are being watched, I don’t think this means anything at all.

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  2. As the article rightly points out, schedule selling is to enable selling without signaling or acting on inside information. If the schedule selling were to suddenly have stopped that would surely violate the point.

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  3. Netflix stock is 94% institutionally owned. I’m supposed to feel bad that the banks are losing money on Netflix stock when they do SO much worse than what Reed Hastings is supposedly doing?! 

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