Netflix, Inc. (NASDAQ:NFLX) stocks fell this week when membership growth failed to meet analysts’ expectations, but CEO Reed Hastings says that investors don’t understand the company’s long-term strategy, says Fortune contributor Kevin Kelleher.


Netflix drops after earnings report

Netflix, Inc. (NASDAQ:NFLX) dropped 7 percent minutes after reporting its Q2 earnings and the addition of 630,000 new subscribers. This number was within the company’s guidance, but significantly less than last quarter’s 2 million surge in net subscribers and less than many analysts had predicted. Netflix stocks dropped not because the company failed to hit a milestone, but because people outside the company failed to understand what it’s trying to do.

Hastings described Netflix, Inc. (NASDAQ:NFLX) as being in the ‘membership happiness business,’ with plans to completely change the way people interact with television shows. He was optimistic about the impact of the Arrested Development reboot, but then demurred when asked to give hard numbers to prove the show had increased subscriptions.

The disconnect between investors’ quarterly demands and Hasting’s long view of the company “has contributed to the speculation that has left Netflix, Inc. (NASDAQ:NFLX)’s stock one of the most volatile for a large-cap stock. Netflix traded briefly above $300 two years ago, then plunged as low as $52 a year ago after a botched attempt to change subscription pricing, then rose back to $270 this month amid optimism its HBO-like programming strategy was working,” says Kelleher.

But he doesn’t give Hastings a complete pass on the issue, saying that the CEO really should find better metrics for explaining why the company is on track, assuming that it actually is. If total subscriptions are the only measure analysts have to work with, Hastings shouldn’t be surprised when it becomes the basis of their valuations.

Kelleher warns Reed Hastings

Kelleher warns that Hastings should also find a way to temper expectations of Netflix, Inc. (NASDAQ:NFLX)’s biggest boosters because, “the stock is so overvalued that even [a] slightly bad pieces of news – such as the subscription adds in the recent quarter – could precipitate a sudden selloff in its shares.”

Hastings like to tell people that investing in Netflix means investing in the future of television, and in a sense it’s the truth. Other companies including Google Inc (NASDAQ:GOOG) and, Inc. (NASDAQ:AMZN) are making forays into digital TV, with limited success so far, but if the prevailing model turns out to be something different, they have plenty of other revenue streams. Netflix will either become a dominant player in digital TV, or a company that went deep with the wrong business model—but one quarter of soft subscription numbers won’t be the deciding factor either way.