There’s space to argue about real yields and their definition. But the one thing we know for sure is that the contradictions in currency markets will be resolved, somehow or other.
Reopening: Bad For Some
For all the excitement in the fixed income world, stocks had a good day. Then the market closed, and Netflix Inc. announced its results for the first quarter. For the first time in more than a decade, its number of subscribers had declined (slightly) from the previous quarter. Cue carnage.
In after-hours trading, the Netflix share price came down more than 25%. This is the second quarter when results that didn’t boost hopes for further revenue growth prompted a collapse in the share price. This is more about valuation than sales. If we look at Netflix’s price/prospective sales ratio, the last decade has been a story of ever-greater optimism expressed through valuation, and then a sudden return to reality. The line indicates where the Netflix price/sales ratio will be now, if the after-hours share price holds up.
What conclusions can we draw? First, it’s at least good news that this is tangible evidence of reopening post-Covid; very slightly fewer of us are spending money on streaming videos. Second, it tends to confirm the folly that many investors were pricing stocks that did well out of the pandemic on the implicit assumption that lockdown behavior would continue in perpetuity. Netflix was a great place to shelter, but it was never a great idea to assume that its growth would continue.
Third, the extent of the crash in the share price for results that aren’t that bad shows just how much of Netflix’s value was locked in the future. It’s a classic long-duration stock. That makes it sensitive to changes in interest rates, and it’s also very sensitive to slight changes in future growth assumptions.
Fourth, we’re now seeing one of the fallacies behind FANG investing brought ruthlessly to light. Each of the big internet platforms has been priced as though it will achieve dominance, but in fact many of the FANGs compete with each other; Apple Inc. and Amazon.com Inc. are trying to get a share of Netflix’s streaming revenues, Apple and Meta Platforms Inc. are in open conflict, and so on. They can’t all simultaneously achieve the dominance that is possible for each individually. Any day now, we can expect the chatter to get going over who will buy Netflix and for how much—and that will pose a fascinating question for the antitrust authorities. Apple and Amazon would both be logical buyers, but should they be permitted to make such an acquisition?
Finally, the “no skidmarks” way the share price has twice fallen vertically (borrowing a phrase from Peter Atwater of Financial Insyghts LLC) is concerning. There is a lot of hope expressed in valuations, and the slightest challenge to that hope means instant crash, with no attempt to squeeze the brakes first. It’s not encouraging.