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Netflix Dilutes Stock

Thursday Nov 24, 2011

Netflix provides the perfect example of why we study accounting. NFLX bought back $400 M of its own stock since 2010, a good deal of it at $228. Now it is issuing more stock and bonds to raise cash. Total debt is more than the market capitalization. 

NfLX foolishly bought its own stock at high prices and now is paying the price. Here is more than you might want to know but as you can see the stock continues to fall in price. 

Along with Olympus this is an example of just how fast a company can go from yesterday's hero to today's clown, along with its management. 

We are studying basic and diluted earnings per share in ACCT 3301, 3310, and 3312. How has NFLX diluted its earnings?  What were its mistakes?

Screen shot 2011-11-24 at 10.46.22 AM

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5 responses to “Netflix Dilutes Stock”

  1. Luis Martinez Avatar
    Luis Martinez

    By increasing the number of shares outstanding, you diminish the earnings per share. Selling shares brings a nice infusion of cash for the company, but “dilutes” the shareholders stock value as stated above. I know the company decided to raise prices, and this triggered a customer backlash, but I have to wonder why they concluded it was worth the risk. I really don’t know how they assess the risk in such a situation. As a decision-maker, who would you turn to on your staff to assess the potential loss of customers by raising prices? Is this an accoutant’s job? If so, I might need to brush up on my statistical analysis training…

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  2. Dennis Elam Avatar
    Dennis Elam

    As Luis says, why anyone would pay $228 to buy back their own stock is beyond me. This will make a good case study now that I think about it on cash management and dilution.

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  3. Phillip Garcia Avatar
    Phillip Garcia

    What was NFLX thinking! I saw in the news that Blockbuster is trying to take advantage of NFLX misfortunes. NFLX is just wasting the cash (assets), and EPS will not look good for any future outside investors. I am not a big high class company executive, but I would Not have bought the stock at $228 per share of my own company’s stock and some outside investors will not too.

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  4. Javier Carvajal Avatar
    Javier Carvajal

    Where do you start to talk about Netflix? the arrogance of the company to think that it can raise their prices that high with out any consequences was ridiculous. First, the stock was inflated to begin with and now that customers are fleeing left and right, they are in a lot of trouble. I think they won’t go under but they do have hard times ahead. The worst is not over for this company because Blockbuster is trying to make a come back and seems they are doing it at the right time too.

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  5. Yesenia Banuelos Avatar
    Yesenia Banuelos

    Netflix was not thinking throughly when they rasied there price on there stock and then bought it. Like the professor said Netflixs is now paying for their mistake.

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