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25 July 2019

Netflix handed laughable lawsuit by disgruntled shareholder

There is a special place in hell reserved for those who kick a man while he is down, especially when that someone has transformed our industry for the better. This was the case as a Netflix shareholder went about suing the very company which has driven OTT video to unprecedented heights – seemingly blind to the bigger picture and hanging on unrelenting to the company’s Q2 subscriber overestimates.

Forgive us for sounding like a broken record, but for those who missed our coverage of Netflix’s second quarter results last week, the TLDR (too long; didn’t read) is that Netflix achieved an historic moment by surpassing the 150 million subscribers milestone in Q2, not that you’d know it going by the majority of headlines. On top of that, the company’s revenues are on the threshold of $5 billion a quarter. Anyone would have been laughed out of the room and down the road by the pay TV old guard a few years ago by suggesting a pure video streaming business could reach anything close to $5 billion a quarter.

Anyway, back to the lawsuit, which appears to have muddied the terms “forecast” and “fact”. The shareholder, called Johan Wallerstein, is suing Netflix CEO Reed Hastings and CFO Spencer Neumann for providing “false and misleading” statements relating to the company’s operational and financial KPI projections. Legal representative Laurence Rosen is clearly undeterred by another term, “forward looking statements” – types of statement that cannot be sustained as fact and are protected under the Private Securities Litigation Reform Act of 1995, which is precisely why this lawsuit should not succeed.

Specifically, the filing alleges that Reed and Neumann made false and/or misleading statements and failed to disclose that Netflix would not be able to gain its expected target of new subscribers in Q2, and that Netflix would also lose domestic subscribers in Q2. The legal document references 5 specific statements made during the company’s letter to shareholders and earnings call in April 2019 after publishing first quarter results, as well a bunch of figures from the most recent set of results.

As well as the subscriber forecast misses, Wallerstein has taken issue with the recent Netflix price hikes and statements related to certain programming which were projected to boost performance and ultimately fell short. Clearly the accuser hasn’t been in the content game very long, expecting immediate return on investment for every new original title, when in reality content production operates more of a stab-in-the-dark type model.

The issue with price hikes is bizarre as this has always been inevitable as Netflix aims to strike a balance between popularity and profitability.

Wallerstein is claiming damages upon the revelation of the alleged corrective disclosure, otherwise known as Netflix’s 13% stock dive as a direct result of Q2 underperformance.

The US District Court of California filing, as spotted by the Hollywood Reporter, cites a complaint against Hastings and Neumann individually and on behalf of all other persons similarly situated, suggesting other shareholders are backing Wallerstein’s case, although this is unconfirmed.

As a reminder, Netflix lost ground for the first time since 2011 as net losses came in at 126,000 subscribers in the US, dropping to 60.1 million. No doubt this is a significant setback for Netflix, but – as we stressed last week – we fully expect the company to recover in style as 2019 progresses and Wallerstein will be left sparing his blushes.