FANG stocks are Losing their Death Grip on the Bubble Market

Case Study: Netflix begins to correct severely

Netflix is a Falling Knife Today and it bodes for Darker days ahead for FANG

What’s worse to the markets than impending doom in Ukraine. Netflix apparently!? We sometimes forget that the “N” in FANG refers to Netflix.

Netflix is down 22% at the time of writing just today. Bitcoin seems to be tethered to BigTech, as it is down another 5% as well.

If the FANG begins to unravel from absurd P/E ratios, it dooms the entire market due to the high concentration of BigTech and NASDAQ 100’s top 10% weight. It’s top heavy, like a Cathie Wood ETF with too much weight in Tesla.

Netflix like Peloton is making the worst possible gamble. It’s raising prices amid a slowdown in subscriber growth at a time of high inflation. Netflix stock may be dead money amidst muted results in 1Q and the seasonally weak 2Q.

Will FANG Impact the NASDAQ Correction?

In fact so far today, Netflix is dragging the entire Nasdaq Composite that is on pace for its worst week since 2020.

• Netflix still beat analyst expectations on the top and bottom line and in user numbers for the quarter.

• The question of competition is even more crucial given Netflix recently raised prices in its standard plan from $13.99 to $15.49 per month.

• The problem is rising competition is exactly what stocks like Tesla face in the coming months and years.

Netflix is most likely a herald of doom for FANG stocks and a BigTech correction that is way overdue. Even after today’s correction Netflix has a P/E ratio of 36.7. That’s not at all a sustainable number. Slower growth means Netflix is no longer providing top value entertainment against YouTube, TikTok and the rest of streaming.

Think about it, this Earnings is off to rocky start. Netflix is the first major tech stock to report earnings this season, with Apple and Tesla slated to post earnings next week. I think we can safely expect the correction to continue into the last week of January, 2021 especially as a Ukraine invasion could occur in the next eight weeks amid rising geopolitical tensions.

The Pandemic Stocks are Bursting from the Equity Bubble

Netflix executives have infamously pointed to things like sleep as potential competitors, claiming anything else users could be doing with their time is competition. Those things? YouTube, TikTok and Web 3.0 activities like NFTs and investing in crypto. Participating on the Creator Economy, having side gigs. Pandemic fatigue also means consumers binged their heart out during several stops and starts of our Covid-19 new normal.

Netflix increased prices at the worst time for consumers who are feeling the financial pinch of declining savings. Netflix is down 15% year to date, but this could just be the beginning of a BigTech correction. No asset class is infallible even as investors believe BigTech are both defensive and growth stocks. Microsoft just spent around half of its cash pile to acquire Activision. They have so much cash they don’t even know what to do with it.

After reaching nearly $700 stock price in November, 2021, Netflix is now down to $400. Its pandemic shock price on March 20th, 2020 was $332. That’s quite a correction already for a supposed FANG stock.

Netflix has Slower Subscriber Growth and Higher Prices During Inflation

According to Yahoo Finance:

• Netflix added 8.28 million global paid net subscribers in the last quarter of 2021, beating the 8.13 forecasted by analysts, according to Bloomberg data. But it's outlook wasn't too inspiring.

• The company said it expects to add 2.5 million subscribers in the first quarter, compared to 3.98 million during the first quarter last year.

If that’s not slower subscriber growth I don’t know what is. Their market cap is around $180 Billion now, which could be still over-priced.

The problem for earnings this quarter is all about guidance. Morgan Stanley, KeyBank and Barclays all downgraded Netflix shares on today Friday January 21st, 2022.

The Nasdaq Composite’s struggle is largely due to a surge in government bond rates this week. The U.S. 10-year Treasury hit as high as 1.9% on Wednesday as investors focused on the Federal Reserve’s timeline for raising interest rates and broadly tightening monetary policy. Or so the narrative goes.

The problem with first-mover advantages for companies like Netflix or Tesla is you cannot know what real competitive environments for these firms looks like until it’s really there such as we’ll see in the likes of 2024. Granted, it’s still “remains early days” for subscriber growth opportunity overall, but the same can be said for competition. Their market share and subscribers invariably decline as live-streaming and EV sectors heat up as the new normal.

It doesn’t really matter how high their revenue is today, it’s about the TAM of their industry and the competitive pressures that will mount. Netflix will be lucky to add 6 million subscribers next year. Meanwhile, analysts had expected 6.93 million in the first quarter, according to StreetAccount estimates. That’s a major slowdown like the case of Pinterest. The pandemic surge in demand like we saw with Peloton is also a momentum illusion, not a new normal.

Netflix is Losing Mindshare in the Attention Economy Broadly Speaking

Netflix trying to get into gaming shows it’s worried about it share in the attention economy of 2022. The quality of its product outside of Korean productions has clearly declined in recent months and years. But its prices keep going up? That’s not a good recipe with slower subscription demand.

Netflix, wanting to attract the 800 million to 900 million households that use either broadband internet or pay-TV, said it’s still early days when it comes to reaching that number. Still cash burning Netflix has always been a special kind of magical thinking. With Amazon, Apple, Disney and others so likely to spend more, it will begin to cut into their growth and revenue. As YouTube, TikTok and Bilibili improve their product, more cuts in eyeballs per month.

Where can Netflix go put down as its first-mover advantage begins to fade?

The company cited increased competition and the strong U.S. dollar among the reasons for the so-so report. Netflix is not the incredible product it once was before the pandemic. As consumers we all intuitively realize this.

Netflix’s strategy is to increase prices as customers become even more entrenched in the company’s exclusive content. Price increases can help offset waning customer growth. I think this equation really breaks down about mid 2023 or early 2024. Netflix at a P/E ratio above 30 is a gamble to me. Netflix will have a churn problem in the next 18 months.

Thanks for reading!

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