In today’s Money Morning…Netflix is at an impasse…a telling earnings season…finding the right tech for the right portfolio…and more…
The big market story to come out overnight was, of course, Netflix.
By now you’ve probably already seen the many headlines: a 35% share price catastrophe, 200,000 lost subscribers, and desperate plans to recoup more money from existing customers…
The long and short of it is Netflix is at an impasse.
In fact, I’d argue that the entire streaming industry is at an impasse.
We’ve reached a point where there are so many different platforms that it has become far too fragmented. In many ways, streaming services have become the very thing they were trying to replace: cable networks.
No one wants to spend $100 a month on five different services just to watch what they want. That’s what made Netflix so appealing in the first place. It was cheap, and it contained nearly everything most people wanted to see.
Now, though, with licences scattered across so many different networks, streaming needs a rethink. But that is a discussion for another day…
Right now, all I want to focus on is what this huge loss for Netflix means for investors — even for those who don’t own Netflix shares. Because whenever a big company endures this kind of result, it forces us all to start asking questions about other tech stocks.
A telling earnings season
The entire reason this Netflix story is in the news is because we’re in the midst of an earnings season for US companies. Public companies are all releasing their first quarter results for the world to see, giving us our first real look at how inflation may be hitting their bottom lines.
After all, I suspect that the main reason Netflix is losing a lot of subscribers is that it is the first thing to be dropped by households when budgets get tighter. Plus, if the content just isn’t there or isn’t enjoyable, that makes this choice even easier for people.
It may even be a case of more people sharing Netflix accounts among family and friends. Why pay the full price if you can team up with someone and share the cost?
That’s something that Netflix management is clearly aware of and not keen on. We’ve seen plenty of talk about cracking down on this sort of account sharing to come.
Again, though, the broader point for investors is that it showcases how fragile the business model can be. It’s a fairly common criticism of many ‘aggressive growth’ stocks, not just Netflix.
As City Index poignantly notes:
‘Ironically, the rapid, unexpected growth in work-from-home stocks like Zoom Video (ZM), Docusign (DOCU), and Netflix (NFLX) over the last couple of years may have ultimately been a curse; investors bid up many such tech stocks on hopes that the rapid growth would be maintained but instead the firms have struggled to scale and in many cases are trading lower than they were pre-pandemic.’
Which begs the question, is it time to dump tech stocks entirely?
Finding the right tech for the right portfolio
Of course, the answer is far from a simple yes or no.
Investing is all about weighing up your goals, your circumstances, and your knowledge. You have to know where your strengths lie and what it is you hope to achieve.
So with that in mind, not all tech stocks will be right for all investors.
The ever-popular FAANG stocks might actually be the most at risk: particularly Netflix and Facebook (Meta). After all, these companies are still trading at fairly ridiculous multiples despite the already gargantuan valuations they carry.
At what point do investors finally consider the possibility that growth is not infinite?
That’s why, in my view, at least, the mid-cap and smaller sectors of tech are far more exciting. Investors who have a higher risk appetite should really be looking at the next wave of companies, in my view.
Over the next decade, I expect we’ll see plenty of new and exciting developments that help lift a lot of these relatively unknown names into the spotlight — just like the rise of the internet and subsequent developments brought us these FAANG stocks.
As for what they might be, who knows.
We’ve talked about concepts such as the Metaverse, brain-computer interfaces, cryptocurrency, and more in Money Morning. These are just a few examples of the kinds of new and exciting concepts that are being experimented with.
I fully expect all three of these to become more fleshed out and commercialised in the decade to come. But as for what that may look like and how one could invest in it, there is a multitude of possibilities.
That’s what makes ‘tech stocks’ so interesting and potentially lucrative.
It’s all about solving a problem with a viable market solution.
Netflix is just the latest example of a company that has hit its first major roadblock. The only way they will be able to resolve it is with further innovation.
Time will tell if that is possible or not. But for tech investors, it should remind you that finding the biggest winners isn’t easy.
Growth isn’t a virtue; it is something that stems from brilliant ideas or breakthrough concepts. And if you’re looking for the best returns, you need to identify the companies with that potential.
Editor, Money Morning
Ryan is also the Editor of Australian Small-Cap Investigator, a stock tipping newsletter that hunts down promising small-cap stocks. For information on how to subscribe and see what Ryan’s telling subscribers right now, click here.