Netflix is Fluxed


Netflix announced that it started to lose subscribers today and whop! It loses $50 billion in market cap in a day.

This is the 5 day graph for Netflix – it looks really bad. Presumably the security at Netflix HQ have locked all upstairs windows for fear of jumpers.

I’ve used Netflix for a while – tricked in with a free subscription to watch Arrested Development (Season 4) and I’ve stayed a member (paying) gradually more and more until now it’s a regular monthly outgoing (classified under “entertainment”).

But I really did think about cancelling it for a while (our renewal date was the 19th, so I’ve missed it again this month) as I didn’t like the fact that they are hiking our monthly cost and we already pay for Amazon’s Prime service – which is comparable in my eyes and has the excellent Mad Men (read my post on 7 things about FI I learnt from Mad Men is you feel that this post is going nowhere

I was also discussing with the Lady about signing up for the UK TV Licence – something which I’ve not had in about 12 year (and I wrote about it here). The reasons for quitting TV were two-fold:

1. TV was a way for me to waste my evenings when home from work
2. It was costing me money

However, the cost of £159 a year or about £13 a month is rather like that Netflix is charging me and for my kids (the Master and Little Lady) the kids programmes are great on CBeebies – like Bitz and Bob and Octonauts plus the Lady definitely has an unhealthy sexual fixation on Mr Tumble – which is lucky since we share the same body shape.

We’re all friends!

Consumer Crunch (or we are all f**king broke)

So, inflation is rising costs and people are cutting back. Of course, there was a Radio 4 programme on a few weeks ago with someone saying that their rent is going up by £150 a month, so cutting out Netflix or Spotify won’t make much of a difference.

If money is always tight, it’s structural spending that is hurting, not discretionary spending. If you are watching calories, it’s the cake that is making you fat, not the cherry on top.

When the young are being fleeced and squeezed through rents and house prices (as well as 12% interest on student loans!), to pay for the pensions and retirement of their older peers – blaming avocados or Netflix for their predicament shows wilful ignorance of reality.

Netflix – the canary in the online?

Netflix at once seems modern but the model of collecting monthly monies from users seems quite simple. Potential revenues could be: globally 1 billion users at $10 a month = $120 billion a year in turnover. Net profit 20% and that’s $24 billion. Put a P/E of 12 (I’m old-school) and the enterprise is worth $288 billion. Not far off what it was worth a few weeks ago. To assume that it’s worth any more is foolhardy and change any of those number (500 m users, $5 a month, 10% net profit) and it’s worth a whole lot more.

According to my google finanace it’s now worth $150 billion, has a P/E of 20.21 and profits of $7.4 billion.

Compare that to a stalwart like Unilever which is worth about $115 billion, has a P/E of 18 and profits of $6.4 billion – they are not 100% off. We don’t expect our fast moving consumer goods companies to be worth trillions and double in value every 18 months – so why should 21st Blockbuster be any different?

And which would you rather invest in? Unilever with its fats and soaps is very 20th Century but at least their profits are paid out in dividends to help you pay for your fats and soaps – and even Netflix too if you don’t waste it on avocado toast you daft millennials!

Peak Streaming or the Consumer Crunch?

But Netflix appears to have reached peak streaming – everyone who has it, has it and everyone who doesn’t, doesn’t want it. Plus, to keep users they need to spend more to create the content to keep us hooked. It’s a slippery slope from start-up / disruptor to a steady as she goes / distributor. Margins will fall and profits will stablise. How was this was a surprise to anyone?

Economics a funny business – and market traders who are betting on whether a share is priced too low or too high can bet on how they think it’ll go – but to see a company that’s worth hundreds of billions of dollars lose a third of its (perceived) value in one day due to flatlining sales (that should have been forecast?) is extraordinary. A lot of smart guys were caught out today.

This isn’t some anomaly share like GameStop – this was Netflix – the guys you pay £4.99 / £6.99 / £9.99 / £11.99 / £15.99 (delete as appropriate) every month.

Now the share price looks like it’s firmly below the 50 / 100 / 365 / 500 / 1000 / 5000 day moving average. From this point onwards there’s a lot of money to be made and with trading, all money made is lost by someone else.

If the market is overvalued and a crash coming is there an alternative that’s not low-cost ETFs?

Asking for a friend you see. I am lucky that I don’t particularly own shares in Netflix, but I’m sure that 0.25% or 0.1% of half the ETFs I own is made up of them and even better – Netflix is April’s Emperor’s New Clothes story. In May it’ll be something else which is hyped up as being the next big thing and it proves to not be as profitable. I saw that Tesla is a likely candidate – I said it before and I’ll be wrong again.

If picking winners is for losers and backing the market means you get exposure to all good or bad and keeping money in cash guarantees you’ll lose money (inflation anyone?) then what’s the alternative? Paying off your student loan might be (or might not…)

Retrospect

That graph of Netflix show you a great example of when it was a good idea to buy (anytime before 2018 it seems – before it hit $200/share. The sellers in 2011 who dragged the price from $40 to less than $20 will still be kicking themselves at today’s price of around $200. Now it’s totally obvious that the time to sell was at $500/share – but our own psychology makes us think that the jump from $200 to $500 will be just the same as the jump from $500 to $1,000 a share. Past performance showed that this was destined to keep booming and now it’s textbook boom/bust – we’ll learn this and then we’ll all forget all about it in time for the next time it happens.

What do you think? Was Netflix and other FAANGs part of your retirement plan? Will I always be wrong about Musk and Tesla?

Is Netflix the first domino into a strange new world where we have to accept that some years the S&P doesn’t jump by 10X inflation annually and infinitum? Let me know.

Thanks, GFF

9 Comments

  1. It’s worth looking at how well investors in railways did in the 19th century. Wonderful new tech, world-changing tech: the customers did very well out of them, the investors less so.
    Compared with railways a Netflix seems pretty flimsy. So does a Tesla: now that Mr Musk has decided to annoy the Powers That Be we’ll see how resilient his company is.

    Liked by 1 person

    1. I was at the canal museum in London last week and it’s an interesting story. Lots of investment and even at the boom times a lot of canals were disasters from the investors pocket.
      Of course the legacy is probably the best recreational paths in the UK and a haven away from the pure noise of the roads.

      But a lot of this new tech seems like old tech – Netflix is just a Blockbuster with a production arm and no physical stores

      Like

  2. I’m waiting until all episodes of Better Call Saul are released and then I’ll resurrect my much cheaper Argentina Netflix subscription for a month.

    As you point out, companies cannot continue growing forever – especially when they are based on a discretionary spending offering. Uber eats are another good example.

    Last week I sat 20 feet outside Cafe Nero and had Uber Eats deliver my lunch to me. Using a promo code (£12 off a £15 spend) it was cheaper to get it delivered than buy it in the store, even when all fees were added. Of course I only got the promo code as I signed up as a new user and Uber Eats now think they have a larger customer base but instead they have many existing customers simply gaming the system for better offers.

    Liked by 1 person

  3. It’s madness really. I took my son for a meal at our local pub yesterday evening and it would have been 50% cheaper to have ordered the same meal via Uber Eats and have it delivered to a table in the beer garden. I was tempted but didn’t want to get barred. Instead we settled for using O2 priority and got our drinks free instead.

    Liked by 1 person

  4. Netflix is probably in my global trackers so this has probably inadvertently hit my portfolio.

    Plugging the loophole of different households being able to share passwords (without paying) was a must, though probably pissed a lot of cheapskate people off. I guess they should drop the price of memberships so that different households will actually pay. I currently don’t have a Netflix membership as I’m on a discounted Now TV plan but when that ends, I may see what Netflix has got to offer.

    Also currently have Amazon Prime (for shopping, tv and reading), plus I’ve always paid my TV licence but I do watch a lot of stuff on the iPlayer, listen to the BBC’s various radio stations and podcasts so I guess I get some of my money’s worth.

    Liked by 2 people

    1. I suppose that you are not much different from most people. So maybe £50 – £100 a month for home entertainment will be a typical household budget once you add in broadband, TV licence, streaming and Amazon?
      Add on a sports package, YouTube premium, Spotify… That’ll add up to quite a bit

      Liked by 2 people

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