Netflix (NFLX 6.46%) stock jumped 7% after hours last night after the streaming leader posted strong subscriber growth in its fourth-quarter earnings report and offered encouraging guidance for 2023. The 7% gain also stayed in place in Friday’s morning session.
However, the real news was that co-founder Reed Hastings would step down as co-CEO and move on to the executive chair position. Greg Peters is being promoted from chief operating officer to co-CEO, sharing the leadership position with chief content officer Ted Sarandos.
Hastings has led the company since its founding in 1997, through its early days as a DVD-by-mail company, its evolution to streaming, and its growth into a media powerhouse that has transformed Hollywood. Along the way, he’s delivered extraordinary returns for investors with the stock up more than 27,000% since its 2002 initial public offering, or 31% annualized growth.
In addition to those accomplishments, Hastings is also regarded as a visionary in the sector, and more than anyone else has made the streaming industry what it is today, seeing the potential of disrupting the linear TV ecosystem. In 2015, he said, “We will come to see that linear TV declines every year for the next 20 years, and that internet TV rises every year for the next 20 years,” and that prediction rings true so far. As co-CEO Ted Sarandos put it on the recent earnings call, “Reed has been able to see around corners.”
In the shareholder letter, the company said Hastings’ move to the executive chair position and Peters’ ascension to co-CEO completes its “succession process.” Still, the company had never openly discussed Hastings’ departure before.
Sarandos became co-CEO in July 2020, the first step in the succession plan, and the leaders said that Sarandos and Peters had been handling the day-to-day business successfully for some time. The company said the decision makes formal the way the company has already been operating internally. Explaining why the time was right for the transition, Hastings said simply that they were ready. At 62, he’s also approaching traditional retirement age.
Hastings added that the three of them had worked together for 15 years, and he had full confidence in their leadership. In a blog post, he said, “I look forward to working with them in this role for many years to come.”
What it means for investors
It’s too early to know how Hastings’ departure will affect the company, but it’s clear that Sarandos and Peters have big shoes to fill. Hastings is not only admired on Wall Street, but also seems well respected by the Netflix rank and file. On the job review site Glassdoor, 89% of respondents say they approve of him as CEO, and the company ranked No. 40 on the site’s list of best places to work. Netflix is also known for a unique and now widely imitated management philosophy developed under Hastings.
His exit from the CEO chair comes as the company is at a key crossroads. It just launched its advertising tier and is rolling out its new paid sharing feature, which it expects to boost revenue. However, the company also faces a host of new competitors, a maturing market in North America, and slowing growth as revenue grew just 2% in the fourth quarter, or 10% on a currency-neutral basis.
The recent return of Bob Iger at Walt Disney is also a reminder that CEO transitions don’t always go according to plan, and some Amazon employees are reportedly agitating for the return of Jeff Bezos as well.
Netflix management said there wouldn’t be any change in strategy with the transition, and Hastings said he’s still heavily invested in the company’s success, indicating he may be more involved than the typical executive chair — a good sign for investors.
With Hastings’ blessing and training, Sarandos and Peters deserve investors’ trust, but shareholders should keep a close eye on its performance. The company’s 2023 guidance was strong, calling for free cash flow to nearly double to $3 billion, but things change fast in the streaming sector, and Netflix will need the kind of foresight that Hastings brought in order to stay on top of the industry.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Jeremy Bowman has positions in Amazon.com, Netflix, and Walt Disney. The Motley Fool has positions in and recommends Amazon.com, Netflix, and Walt Disney. The Motley Fool recommends the following options: long January 2024 $145 calls on Walt Disney and short January 2024 $155 calls on Walt Disney. The Motley Fool has a disclosure policy.