Netflix and the end of the FAANG era..

Blain’s Morning Porridge 20 April 2022 – Netflix and the end of the FAANG era..

“The light that burns twice as bright burns half as long – and you have burned so very, very brightly, Roy.”

This morning: Netflix just experienced its’ judder moment – and it is shaking markets. Overnight the streamer became a completely different investment proposition, even though we’ve been warning it was inevitable. There are lessons to be learnt across the equity market.

Did you feel markets judder last night? I am amazed so many analysts are shocked Netflix took a spanking last night. 25% price crash? Oh, we haven’t seen anything like that since.. well.. Facebook getting slapped similarly (down 20%) a few months ago when Zuck admitted it was a broken model. The real question everyone should be asking this morning – which market leading stock will be next to reveal its hidden flaws and tumble from grace. (Clue: I’m betting Tesla, but that’s just too obvious.)

Netflix subscriptions didn’t rise the expected 2 million, but fell by 200,000! Who would have guessed that was even was possible? (US Readers: Sarcasm Alert.) The company says it will get worse – they expect to lose more subscribers as growth slows, recession and inflation hit, and competition in the Streaming Wars hots up. NSS award winging its way to them.

Gosh… who would have thought, but of course there will be buyers out there thinking its now a cheap stock. Nope. It’s still trading at a disruptive multiple, although it’s now a broken dream. The reality is a deeper repricing to reflect its “now” reality: struggle and costs.

The key is we now know its subscription base is not infinite, but limited – now investors have to calculate its future returns based on a constrained and highly competitive market, and work out just how its going to generate returns while having to spend billions creating content to simple stand still. It will be attritional. When its only making $1.2 bln a quarter in profits, that ability to spend future subscription on present content becomes limited.

This morning it’s talking about a new model. Advertising, higher charges and cutting shared subscriptions. Bang goes that dream… Yesterday Netflix might have been the no 1 streamer. Today it is fighting for its existence. Without the depth of capital or a back catalogue … its more likely to become an also ran, and maybe an acquisition target. Not everyone can win in the Streaming Wars.

I’ve been warning for years about the dangers to Netflix from an increasingly saturated market for years – you can find articles by searching on the Morning Porridge website search function. My most recent comment (aside from a piece on the possibilities raised by Drive to Survive) was Netflix Got Big, But never Built a Moat or Margins.

As regular as clockwork – every 20 years or so – the market gets terribly exuberant and binges on the latest fad – coal, railways, steel, ships, cars, planes, computers, dot.coms, and latterly disruption – the art of finding new ways to do old things worse. Companies rise. Companies fall. Few Corporates survive more than a couple of decades at the top – their brief years of innovative glory and stellar multiples are swiftly surpassed by the momentum of the next new, new thing, increasingly sclerotic and greedy management, the rise of internal bureaucracy, and eased towards obscurity by the dull dead hand of regulation….

It’s called evolution. Some species thrive. Most stocks end up evolutionary dead ends. Through the course of stock market history, the bulk of returns have been generated by a surprisingly small number of highly successful companies. Whatever happened to them, names like US Steel, Shell, Bethlehem, ATT, Sears, Marks & Spencer and a host of others?

The last decade years have been something of a break from evolutionary rule of corporate decline and fall. Today it’s still true that very few companies actually matter… but a surprisingly large number of firms achieved billion dollar plus valuations – often without the intermediate step of actually making any money or building much of a market for themselves. Their success has much to do with the “disruptive tech” founding myth that every great idea can be monetised into gazillions profitable or not, but also to do with five factors around markets:

1. The vast amounts of liquidity that’s been slopping round markets these past 12 years as a result of monetary distortion making any snake-oil maker look a relative value screaming buy.
2. Euphoric markets where everyone comes to believe equities can only ever go up, and stocks are value in themselves – rather than being value from innovating a profitable opportunity!
3. The monetisation and groupthink of analysis – every stock analyst puts a buy on every stock. The critical faculty of the market has vanished.
4. Index investing – there is no such thing as smart investment management. It’s become the business of milking retail fees for the least amount of effort – ie buy the index which is simply what the market believes rather than the investment reality.
5. The rise of the stockpicking superstar – investment show-people who make lots of noise supporting their favourite stocks (which they happen to be heavily invested in…)

In the past stock gurus were dull, boring, considered, individuals with genuine smarts like Ben Graham, and latterly Warren Buffet. Analytical, reliable and focused on fundamentals – asking pertinent questions like “where are the customers yachts?”.

Today’s stock mavens are money harvesters – noisy, frenetic marketing geeks seeking your pension savings with a message about their “unique” mindset and talent… usually barking about their skills predicting the future through their mastery of  disruptive tech. So step aside Cathie Wood, Masayoshi-Son and the hat-stand legion of meme-stock pundits on Reddit.. Your time has gone.

FAANG is such a dead concept. As is probably the NASDAQ.

• Facebook is toast – killed by newer advertising/social media platforms and regulation. Now trying to reverse itself into the Metaverse. A steam train in the age of regional jets.
• Alphabet/Google is struggling in a gloop of regulation that’s sucking the life out it, and increasing consumer dissatisfaction.
• Amazon faces a host of problems and frankly looks tired – check out my last comment on the company.
• Netflix – looks old and vulnerable…

Which leaves..  Apple… Have you looked at the price of a new MacBook recently? You need a mortgage to buy one. This morning’s porridge was written on the train on a HP laptop. It weights a ton, lacks the style, the fine design and the intrinsic beauty of a MacBook – but guess what.. It does exactly the same job for 1/10^th the price. (And my IT guys are happier when I use it..)

Netflix’s NSS moment came last night. We’ve long been warning about how it faces a triple whammy of growing and monetising its subscriber base, increased competition, and constrained consumer discretionary spending. As the numbers in the FT y’day showed – 1.5 mm British families have already cut at least one subscription since lockdown. That number will increase across its entire user base as recession strikes later this year.

She-who-is-Mrs-Blain is asking why we need Disney, Startz, Apple and Britbox when we practically never watch them – not that’s there is anything to watch. I am wondering about Prime as season 2 of Picard is intolerable tripe.

As for Netflix – I’ve come to the conclusion the colour-blind woke-driven casting on bodice ripper Bridgerton is hopelessly racist… I mean, there isn’t a single character of Australian Aboriginal ancestery in it… Shocked? I was. (BTW – there is not a single Scots or Chinese character either… the producers should be cancelled…) 😊

Five things to read this morning:

Thunderer – Fuel Poverty to hit 40% of UK population

FT – Netflix: Dwindling opportunities to boost numbers spawn desperation

Zerohedge – Global Rice Production to Plunge 10% – threatening half of humanity

Forbes – IMF warns of significant slowdown

Bberg – Kremlin Insiders Alarmed by Growing Cost of Putin’s War

Out of time and back to the day job…

Bill Blain

Shard Capital