Netflix Could Be In A 'Dilutive Equity Situation' As Managers Sell Shares

is the world's largest streaming video service, but Albert Fried & Company analyst Rich Tullo has noticed a trend among company managers and directors. "[CEO] Reed Hastings has a quarter of the stock he used to have," Tullo, who serves as the director of research at Albert Fried & Company, told Benzinga. "All the directors have zero shares outstanding in their ownership profile. It tells you they're in a dilutive equity situation. If they really thought it was worth [more], they wouldn't be selling it." Tullo believes that the idea of

(where a film is simultaneously distributed to theaters, DVD and VOD) "is for real and will save [Netflix] from going bankrupt." "It's going to be interesting to see if day-and-date movie is just another version of [what] the streaming business was to DVD," Tullo added. "We have a company that's potentially handing off one business for another. Historically, as they've been doing this, earnings have actually gone down. Peak earnings were over $4 a share and peak earnings this year will be about $3 a share. Peak earnings five years from now, are they gonna be $2 a share? So why do you need to be spending 200 times EPS for a company that structurally can't make money?"

No company can grow forever. When asked if the growth expectations will end, Tullo joked that he thought it ended two years ago. "I think it ends much like Yahoo did where you have a company that'll probably take 10 to 15 years to grow into its valuation," he explained. "It's really overvalued. The business is potentially savable if they start managing their content costs better. And by savable meaning, not gonna go bankrupt in 2016, 2017 when a lot of this $10 billion content liability comes due." Tullo thinks Netflix will turn to the financial markets to raise capital to pay for those deals, some of which may have to be restructured. He said that will be tough to do in a "rising interest rate environment" and said that he expects a "huge convertible deal" in the next 12 months. "Probably 4, 5% preferred dividends, 5, 6% preferred dividends," said Tullo. "That'll be a huge transfer of equity from the common equity holder to the preferred holder and to Hollywood because you're monetizing the content obligation and that's gonna reflect in the stock price. So $10 billion on 60 million shares outstanding right now -- just that deal will probably price in 100 [to] 150 points of downside in the stock. And they need to do that." Disclosure: