Netflix shares have climbed by more than 140% this year, outperforming Wall Street darling Apple and earning the stock a position in the Big Four tech stocks for this year: Facebook, Amazon, Netflix, and Google, also known as FANG. But with such a big move this year, how can Wall Street expect even more next year? Analysts are mostly bullish on the streaming video giant, seeing more room to run in the near term, and now Netflix management have entered their votes of confidence via the structure of their compensation for next year.
Investors apparently are happy again as today shares of Netflix climbed by as much as 1.68% to $119.08 per share after tumbling to a low point of $113.96 per share on Monday.
Netflix execs have lots of skin in the game
In a report dated Dec. 28, Stifel analyst Scott Devitt and his team offered analysis of the compensation structure entered by Netflix management last week. A regulatory filing with the Securities and Exchange Commission indicates that CEO Reed Hastings is getting a raise of 36% in total compensation, while Chief Content Officer Ted Sarandos is getting a 33% increase.
What’s particularly interesting is that both executives’ total compensation packages place heavy emphasis on the stock performance of their company. The Stifel team believes that the executives do have “some discretion” on how their compensation packages are structured in terms of stock versus cash allocations.
Netflix management is motivated
Hastings’ compensation has a 95% concentration in stock options, while Sarandos has a 70% concentration in his total compensation for 2016. In other words, both executives are expecting next year to again be very kind to Netflix because they think the value of those stock options will reap them some hefty profits – even though the streaming company’s shares have soared by more than 140% this year, compared to the S&P 500’s miniscule increase of 0.1% so far year to date.
Clearly Netflix management is optimistic about their company’s near term future and expect it to remain one of next year’s hot stocks. And by allocating large chunks of their compensation to stock options, it means they have quite a lot of skin in the game. They have plenty of motivation to make sure their company has a very successful 2016.
It should be noted that investors do tend to reward companies in which their executives own lots of stock. Tesla Motors CEO and SolarCity Chairman Elon Musk is a prime example. It stands to reason that performance is even more important for an executive owning stock in their company than it is for one who doesn’t have a very big stake or who often sells off shares in bulk.
Healthy raises for executives
The regulatory filing indicates that Hastings will earn $19.95 million next year, a 36% increase from this year’s $14.7 million. Of that total, $19.05 million will be in stock options, which is an increase from 93% to 95% of total compensation. Sarandos will earn $16.8 million, an increase from this year’s $12.6 million. Of that total, $11.8 million comes in stock options, an increase of 23% from this year’s $9.6 million worth of stock options.
Chief Financial Officer David Wells received a 14% raise to $4.2 million for next year, and 43% of his total compensation will be in stock options. Chief Streaming and Partnerships Officer Greg Peters is also seeing a tidy raise from $4.7 million this year to $5.8 million in total compensation this year.
The Stifel team states that they don’t want to jump to conclusions about next year, but they also note that last year’s increase in compensation for Netflix’s top management came right before one of the company’s best years in terms of the performance of its stock price.
“If nothing else, we think this [the focus on stock options in execs’ compensation packages] signals Netflix’s executives are fully on board with the company’s ambitious international expansion plans in 2016,” Devitt and team wrote.
They have a Buy rating and $143 per share price target on the streaming video firm.
Bears starting to warn about valuation
Even though management is clearly expecting a strong 2016 in terms of Netflix’s stock price performance, not everyone is expecting sunshine and rainbows. David Einhorn is one of the more prominent investors to turn bearish on Netflix. He said recently that his firm Greenlight Capital is shorting the company because of the recent spate of downward earnings revisions running counter to the skyrocketing stock price.
The company has been following Amazon’s strategy of spending heavily now to expand quickly, or as bulls say, investing now for future growth later. As a result, earnings estimates are falling as analysts account for all that expansion-related spending.
Competition is also becoming an increasing concern for the streaming firm, with bears warning about Amazon, YouTube, Hulu and others encroaching upon its turf.