- Netflix shares have cratered
- The uses (and limits) of pithy acronyms
- Lots of idea-generating content
Between GAAP and IFRS, TINA and QE, a Reit and an ETF, and a company’s IRR and Ebitda, today’s investor must wade through a small sea of acronyms. Many seem designed to confuse, mystify or obfuscate. Some, such as ESG, become a convenient catch-all for an amorphous zeitgeist.
Others fall by the wayside, or ought to. Two decades after Goldman Sachs economist Jim O’Neill started talking about the Bric countries, it’s high time investors moved on from any grouping that includes Russia or implies some sort of parity between China and Brazil.
Last week, investors signed the obituary of another acronym that until recently was a byword for financial and corporate might.
The proximate cause was the 40 per cent crash in the share price of Netflix (US:NFLX), after the streaming giant shocked investors by announcing the end of an unbroken decade of subscriber growth. It was a brutal blow to a stock whose long-held status as a market darling was cemented in 2013, when it took its place as one quarter of the Fang stocks.
Along with Facebook, Amazon (US:AMZN) and Google, Netflix was singled out as one of four leaders in their fields, whose sky-high valuations were justified by consistently brilliant sales and net income growth.
A blistering market record followed. Between February 2013 and November 2021, the stock jump almost 60-fold, and in the process outperformed the S&P 500 by an average of 39 percentage points a year on a total return basis. Even now, after dropping two-thirds since the start of 2022, the shares have delivered spectacular returns over the past decade.
However, it is now pertinent – if perhaps a little late – to wonder how much the company’s stock market success owed to the reflective glory of its Fang membership. Although it boasts a scalable and hugely popular platform, Netflix has always lacked its peers’ network effects, diversification, and truly innovative intellectual property creation. Established media groups with storied content libraries have quickly mounted stiff competition.
Although the sales trajectory had been strong – growing by an average of 27.5 per cent a year between 2016 and 2021 – Netflix’s accounts were never wholly free of red flags. Since 2014, positive free cash flow was only reported once (in 2020, when many production schedules were put on hold and the world was sat on the sofa). Pre-pandemic, net margins never exceeded 10 per cent. And as we have previously reported, stated earnings appear to be boosted by overly generous rates of amortisation.
Its valuation also had more in common with Tesla (US:TSLA) than Google. At the start of 2021, the stock traded at almost 80 times forward earnings. While every Fang has posted underwhelming earnings figures over the past year – in January it was Meta (US:FB), and this week it was the turn of Alphabet (US:GOOGL) – Netflix’s rich valuation left it especially vulnerable to a fall.
Accordingly, its membership of a hallowed group of tech stocks has likely expired. In truth, few have referred to the Fangs since someone pointed out that two storied tech names – Microsoft (US:MSFT) and Apple (US:AAPL) – were equally if not more deserving of luminary status. Fang soon morphed to Faang, and then the FANMAGs (or FANGAMs).
CNBC commentator Jim Cramer, who coined the original acronym, now argues we should focus on the MAMAAs (Microsoft, Apple, Meta, Amazon and Alphabet). That’s one way to do it. A better approach, noting the group’s rapidly diverging fortunes, is to take each company’s investment case in turn.
