What’s The Deal With Netflix?
Is this the stream life? Is this just fantasy?
Caught in a pandemic, let’s escape from reality. Open your eyes, look up to the TV and see.
I’m just a poor boy. I need no streaming.
Great Ones, if you’ve followed the Netflix (Nasdaq: NFLX) saga for the past couple of months, you know that gains are easy come, easy go. And NFLX stock has gone from little high to little low … seemingly because of how the wind blows.
Since hitting an all-time high of about $701 in October, NFLX stock has plummeted more than 45% — quite literally erasing all of Netflix’s pandemic gains.
I mean, NFLX is trading near levels not seen since early March 2020, right before the pandemic lockdowns in the U.S.
Any way the wind blows, indeed. Nearly two years’ worth of gains … poof, gone … in just a matter of weeks.
So, what exactly happened to NFLX?
Why did everything come crashing down so quickly?
And … today’s biggest question: Why did Bill Ackerman’s Pershing Square hedge fund just drop roughly $1 billion on 3.1 million NFLX shares?
Pitter patter, let’s get at’er!
Bubble, Bubble, Netflix In Trouble
Netflix’s initial descent began with a bit of profit-taking back in October 2021. NFLX stock was at an all-time high, and investors who rode the pandemic rocket were looking to bank some profits.
And then something weird happened. Wall Street started to realize that the pandemic wouldn’t last forever. To you and me, that statement — the pandemic won’t last forever — seems like common sense. It should’ve already been factored into NFLX’s stock price, right?
Well, it was, and it wasn’t. Wall Street knew that pandemic-level subscriber growth wasn’t sustainable. Netflix CEO Reed Hastings made that abundantly clear in every single earnings report since the beginning of the pandemic.
But, somehow, Wall Street investors were more than happy to wear rose-colored glasses about the whole thing … completely forgetting or outright ignoring what was bound to happen once the world started opening up again.
And what, exactly, would happen at the end of the pandemic?
Subscriber churn — i.e., a rapid bout of subscribers canceling and signing up for Netflix service. Many subscribers left because they weren’t at home as much anymore. Many signed up because they finally got jobs and disposable income again.
Whatever the reason, the end result was a churning, bubbling cauldron of subscribers. Or, as Wall Street would put it, rising uncertainty. And we all know that Wall Street hates uncertainty.
This uncertainty escalated into full-blown panic following Netflix’s fourth-quarter earnings report. All in all, the report wasn’t that bad. Netflix beat earnings expectations, matched revenue expectations and beat on subscriber growth. But subscriber guidance? Well, that rolled off a cliff.
Netflix expects to add just 2.5 million subscribers in the first quarter of 2022. For comparison, Netflix added 3.98 million subs in the first quarter of 2021. What’s more, analysts expected 6.93 million new Netflix subscribers for the same period.
The massive disconnect prompted NFLX stock to plunge more than 20% the day following the report. Additionally, the poor subscriber guidance sparked a new and damaging narrative: Has Netflix hit the ceiling on subscribers?
Back To Life, Back To Reality
Great Ones, as a longtime practitioner of investor sentiment analysis … this is what we call peak or near-peak bearish sentiment. Has Netflix hit the ceiling on subscribers? Are you kidding me?!
The same analyst community that spawned this travesty of a narrative also admitted during Netflix’s earnings call that there are “800 million to 900 million homes globally outside of China,” and that Netflix had only penetrated 25% of those homes.
Does 25% market penetration sound like hitting the ceiling to you? Of course it doesn’t.
What’s really going on is that Netflix saw a massive boom in subscribers due to the lockdown. Analysts then factored this pandemic-induced surge into their existing forecasts for Netflix’s growth — without taking into account the churn and volatility that would come once the pandemic ended.
Don’t believe me on that point? Why else would the consensus expect 6.93 million new subscribers heading into the end of the pandemic? It’s like they didn’t even think about people going outside again … or wanting to literally be anywhere else than locked inside their houses.
Analysts also didn’t consider that many customers who wanted to subscribe to Netflix already did so ahead of schedule due to the pandemic. This is called “pull forward” in corporate speech, and if you’ve paid attention to any of Netflix’s post-earnings conference calls, you know all about it.
In short, the pandemic blew up Netflix’s growth plans, allowing the streaming giant to hit growth targets years before it expected to.
Netflix has repeatedly warned about this and tempered its forecasts accordingly. But Wall Street ignored all of those warnings … at least until Netflix’s most recent quarterly report.
All of which brings us to where we are now, with NFLX stock down 45% from its all-time highs.
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Parsing Pershing’s Peculiar Purchase
Great Ones, you know that I don’t recommend following billionaire investing advice or chasing after hedge fund activity. It’s typically a losing game.
You’re not a billionaire, so don’t try to invest like one.
But I wanna invest like Buffett!
Are you Buffett? Do you have Buffett’s money?
Then it ain’t gonna happen.
But I might be ready to eat those words today.
Last week, billionaire investor Bill Ackman announced that his hedge fund, Pershing Square, bought roughly $1 billion in NFLX stock:
Opportunity? But I thought the sky was falling for Netflix! Its subscriber growth capped. It’s hit the ceiling and joining the choir invisible! Or so the financial media would have you believe.
So, why would a multibillion-dollar hedge fund buy stock in a company with no future?
Trick question. It wouldn’t, and it didn’t.
NFLX stock is trading about where it was before the entire pandemic began. And yet, the company has added some 54 million new subscribers during that period.
That’s a 32% growth in subscribers, with the stock essentially going nowhere. What’s more, that 32% growth occurred despite Netflix raising prices.
But that’s not all. At the end of 2019, Netflix reported fourth-quarter revenue of $5.47 billion. Last week, Netflix reported fourth-quarter revenue of $7.7 billion. That’s 40% more revenue.
Do you see it yet, Great Ones? NFLX stock is priced where it was back in late 2019, despite adding 40% more revenue and 32% more subscribers.
It’s no wonder Ackman is delighted. He just bought a crap ton of NFLX stock at a massive discount.
Any Way The Wind Blows…
Before you go and chase Ackman’s NFLX play, there is one more thing to consider: You are not a billionaire. Sorry, but it’s true.
(If you are a billionaire and reading Great Stuff, hit me up! We should hang out sometime.)
What I mean by that is that you might not have the capital or the time to comfortably ride out the volatility that both NFLX stock and the market are gonna see for the foreseeable future.
Ackman isn’t a fool. He didn’t make a mistake buying $1 billion in NFLX shares. However, he can afford to lose a few million in the deal as he patiently waits for Wall Street to come back to its senses and NFLX to trend steadily higher once again.
You, however, probably do not have that kind of financial leeway.
Sure, NFLX stock will move higher again. But the current lull may or may not be the bottom for Netflix.
If you have the available capital and the appropriate risk tolerance to weather potential losses due to broad market volatility, now is a great time to follow Ackman’s lead and snap up NFLX stock at long-term bargain prices.
The financial media’s “Netflix hits the ceiling” narrative is pure fearmongering and baloney. If you can stomach it, NFLX still has plenty of room to grow and the potential to provide serious returns.
But if you aren’t a risk-taker, or you’re already in retirement? There are much better options for steady returns and portfolio growth — Microsoft comes to mind.
Or, better yet … this “backdoor” electric vehicle play.
According to Charles Mizrahi, this groundbreaking technology is going to make gas guzzlers obsolete. But it has nothing to do with electric vehicle manufacturers, lithium-ion batteries or recharging stations.
This is the investment opportunity of a lifetime, but I won’t spoil the surprise.
Thanks for tuning in for this week’s Great Chat. Have a great rest of your weekend!
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Editor, Great Stuff