I hate to say I told you so…
Friday last week, the streaming giant released their fourth quarter results.
Leading up to their fourth quarter results last week, Netflix was on a roll.
They got a few Golden Globe nominations. Analysts talked about how they were the best buy among the FAANGs. Netflix also hiked subscription prices on US subscribers.
I didn’t think expectations for a stock trading at more than 100-times earnings could get any higher. But they did in January this year.
Leading up to their fourth quarter earnings report, the stock climbed more than 30%.
Everyone was expecting to see massive numbers, figures that would blow even optimistic expectations out of the water.
But of course, that didn’t happen.
Netflix’s growth is noticeably slower. Their outlook doesn’t look so rosy either.
Investors that recently jumped in are looking at paper losses. And I expect it could get a lot worse from here on…
Expect to see further declines
Do you remember what it was like investing seven years ago?
Investors were still a bit nervous after seeing Aussie stocks come down in 2011. But had you put cash in the market, you probably would have made money.
Say you picked one of the big banks. Commonwealth Bank of Australia [ASX:CBA] for example. You’d be up 46% today.
What if you picked a tech stock like Carsales.com.au Ltd [ASX:CAR]? You’d be up 138%.
Or what about building products giant Boral Ltd [ASX:BLD]? That’s another 67%.
These returns are massive. Yet I could go on and on with more examples.
The point is stock picking (I’m using hindsight here) wasn’t all that hard back in 2012.
The Aussie market was down. Our central bank was about to lower interest rates further, which would pump more money into the financial system.
All investors had to do was throw money into the market and watch it grow. But don’t expect returns to come so easy this year.
The market might not rise back to pre-2018 decline levels as quickly as you think. You might see further declines ahead.
There is one fund manager, Crispin Odey, who generated a 53% return last year. He’s predicting much larger declines in the near future.
From the Australian Financial Review:
‘In an interview ranging from his views on the market, to Brexit, to how quants are making life difficult for stock pickers, Odey insists last year’s sell-off is just the beginning of a slump that will see him vindicated once again.
‘…As he sees it, equity markets have reversed momentum and credit spreads are widening. In a warning that has remained a constant feature of his letters to investors over the last four years, he predicted that a 50 per cent decline in equities is possible.
‘“I had my recession,” said Odey. “Now it’s your turn.”’
Am I telling you to sit on the sidelines? Absolutely not!
Yet there are some who are comfortable putting their money in safe havens like gold, for now. Billionaire real estate investor Sam Zell is one of those investors. He told Bloomberg he’s stocking up on gold for the first time in his life.
But you don’t have to do the same.
All you need to do for 2019 is make wise decisions. Don’t chuck you hard earned coin into the market and expect it to grow.
If you hear or see something interesting, look into it. Find evidence that backs up your opinions. And if the facts are with you, make the bet.
The odds are stacked heavily against Netflix
I’m going to assume recent Netflix buyers weren’t thinking of a realistic future.
How could they be?
Even after its most recent drop, Netflix trades at 126-times earnings. That means investors are paying $126 for a dollar of earnings today.
The hope is that $1 of earnings will grow year-after-year. But can Netflix increase earnings by a factor of five from here on?
I think the odds are heavily against them. Already, Netflix is starting to show signs of the slower growth investors will have to get used to.
In the fourth quarter, Netflix grew sales by 27%. Global subscriptions grew by 26%. The former is a lot lower than were it was a year ago.
Sales growth was 4.7% quarter-on-quarter. Operating margins declined all the way to 5% and forced Netflix to post negative income growth of 67%.
And take a look at this graph. It shows the stock price and Netflix’s expected earnings per share 12 months into the future.
Source: Zero Hedge
First quarter sales for 2019 are also expected to be about half of what they were in the first quarter of 2018.
Investors thought that dollar of earnings they bought was growing rapidly. Turns out that dollar of earnings continues to grow, but much slower than everyone first thought.
For Netflix to start trading at a reasonable multiple, they’ll have to come up with an extra US$8 billion in income.
Can they do this? Sure, over many years they could add US$8 billion to profits.
But will they do it anytime soon to validate the current multiple investors are buying?
I think the odds are stacked heavily against them.
Editor, Money Morning
PS: In this just released report, Matt Hibbard shows you his top five dividend picks for 2019. Click here to claim your copy today.