Mega-cap enterprises are exhibiting post-earnings price action with a market-moving magnitude the world has never seen before. Panic appears to be the market’s go-to response this earnings season, and not just panic to the downside, but FOMO panic to the upside as well (e.g., Alphabet GOOGL & AMD AMD).
The most devastating fear-fueled post-earnings price action came from the streaming king that looks to be losing its place on the throne and the global social media monopolist that’s making a monumental business pivot into a virtual world.
Netflix NFLX and Meta Platforms FB, formerly Facebook, both lost over 20% of their incomprehensibly large valuations (wiping $100s of billions out of the market in the blink of an eye) following disappointing year-ending results coupled with cautious forward guidance as the pandemic’s digital tailwind slows.
Market sentiment is fragile. Inflation, monetary uncertainty, and whispers of peak growth have investors running for the hills at the first sign of trouble.
A tidal wave of freshman traders & investors flooded into the market in the past 2-years, fueling more active market participation than ever before. This new cohort of market participants has yet to experience anything but the euphoric bull run since the COVID selloff that bottomed in March of 2020. Recent volatility is trigging high-volume panic selling from these green market participants.
This market is ripe with fear, which means investment opportunities are popping up across the ticker board. As the investing guru, Warren Buffett once wisely advised: be greedy when others are fearful, and you better believe that professional money managers are doing just that.
Netflix’s Search For Growth
Netflix was the first of big tech to report its Q4 results, and investors’ incredible disappointment may have just pulled the “big” out of its classification. Despite a top and bottom-line beat for this market-disrupting streaming pioneer, NFLX capitulated roughly 22% in its worst one-day decline in a decade.
This instant valuation had money managers like Bill Ackman (who made billions from calling the COVID selloff) buying up millions of shares ($1.1 billion in value) on this knee-jerk selloff. Netflix’s own CEO, Reed Hastings, even bought $20 million of his own company’s stock to show the market his continued confidence in the business.
NFLX’s forward P/E multiple dropped temporarily into the 20x-range, which is undoubtedly an attractive valuation for this market disruptor. Still, I worry about the future of this streaming business as its subscriber growth rapidly decelerates and well-positioned media giants saturate this space.
Netflix is looking at peak growth in the rearview mirror with that nostalgic longing that makes you do things you might regret, like spending billions to enter the already oversaturated gaming space in an attempt to reinvigorate its one surging growth outlook.
Growth Outlook
Netflix’s domestic subscription growth appears to be topping out, with 75 million being the magic number for North America (US & Canada) that covers the 120 million households in the region. The streaming king is now relying on international subscriber growth and incremental increases in sub-prices for its “endless” expansion to continue.
Investors can no longer justify a 50x+ P/E multiple on NFLX, with only these secondary growth drivers at the company’s disposal. Netflix has lost nearly half of the $300 billion valuation it was given only a couple of months ago as shareholders abandon this pandemic winner as the global economy reemerges from the lockdowns (where Netflix thrived).
My Concerns
My Netflix worries are centered around how management will navigate this growth lapse.
Netflix has recently cleaned house at the C-suite level, and this new management team has largely been brought on in the past 3 years (or less). I’m guessing that NFLX’s Board has tasked this group of enthusiastic leaders with reinvigorating long-term growth.
My biggest worry is that its fresh management team will hemorrhage too much cash attempting to recreate its once-booming streaming growth with new ventures like its gaming segment, that won’t end up adding any value to the company or its shareholders.
Despite what some shareholders may believe, Netflix will never be able to recreate the nascent market-disrupting value that its streaming service rendered when it was introduced in 2007. Netflix changed the way the world consumes movies & TV: cutting the ad-ridden cable cord and allowing users to watch what they want when they want commercial-free.
The streaming idea was such a hit that every production company with a substantial enough library has launched its own on-demand platform. This created a highly competitive landscape for Netflix and forced them to spend billions on building out their own content library to match production houses like Disney (DIS), which had decades upon decades of highly demanded globally recognized content.
Netflix’s new management team has not proven themselves to the markets yet, and it’s being reflected in its share price.
I would stay away until this new leadership class has the approval of the broader investing public.
Meta Platform’s Cliff Diving Opportunity
Meta Platforms (FB), formerly Facebook, the latest victim of big tech’s aggressive post-earnings price action, had over $200 billion of its market value vanish in the blink of an eye following the unexpected disappointment in its quarterly release Wednesday evening. Alphabet (GOOGL) typically reveals highly comparable performance from digital ads to FB (these two companies account for most digital ad-spend in the US). However, these two enterprises couldn’t have released more contrasting results than they did to begin February (2/1 & 2/2).
Alphabet (GOOGL) hit an all-time high during this morning’s opening minute of trade, skyrocketing over 10% as FOMO-ridden investors sprinted into the stock on the heels of a 32% earnings beat coupled with raised guidance. Nevertheless, GOOGL quickly retraced over 2% lower within 3 minutes of that opening high. Ad-rev growth from Google Search & YouTube (now bigger larger than Netflix) were the primary drivers of this internet giant’s relative outperformance.
With these robust results from Google, I would have thought Facebook (aka Meta Platforms) was setting up for a big earnings beat, and I wasn’t alone, with FB trading 1.25% higher in its pre-earnings session. In fact, its normal ad-fueled business did reveal just that, with record topline results that surpassed expectations.
However, what was ostensibly unbeknownst to analysts and investors was the company’s $3.3 billion operating loss from all the “metaverse” spending, which is an extremely ambiguous and unquantifiable new business pivot. The metaverse caused the earnings miss and a loss of investor faith, who trust that the forecasts FB provides analysts accurately depict future performance.
Of course, its EPS miss alone wasn’t enough to cause FB’s 22% after-hours cliff dive. The Facebook platform saw its first-ever user decline, with daily active users dropping by 1 million in the US and Canada, which are indisputably its most valuable customers on a revenue per user basis. Meta Platform’s also cut Q1 revenue guidance by nearly 10% to reflect its new Reels monetization compared to Feed/Stories, as well as some other macro ad-spend concerns.
Metaverse Opportunity
FB is trading at a below 20x forward P/E, below the broader S&P 500’s multiple, providing investors with an excellent opportunity to jump into this future-focused business. As I stated above, the metaverse is an uncharted digital innovation that some investors worry will not gain the consumer traction or profit-driving value that Zuckerberg foresees.
Putting biases towards Facebook and its infamous CEO Mark Zuckerberg aside, the monetizable opportunities of the metaverse are undeniable. Some investors appear to be underestimating the systemic societal shift that the pandemic caused, pulling digital adaptation forward 10-years in a matter of 10-months.
Meta announced last fall that it would be pouring $10 billion into the buildout of its virtual world, but now it’s looking like it will take much more. Management has stated that some aspects of the metaverse’s functionality would be mainstream in as little as 5 years, which I see as a very attainable goal.
The world is more ready for this virtual world than ever, and Meta Platforms is perfectly positioned to usher it in with most of the internet accessing world already utilizing one of its interaction-fueled digital platforms (3.59 billion monthly users). With Oculus under its wing, I have no doubt that Meta is poised for another wave of market-disrupting growth.
The question on analysts’ minds as they remodel FB for its new Reality Labs segment is how much money the company will have to burn before the metaverse starts turning a profit.
Final Thoughts
A strong case can be made for the investment opportunities in both FB and NFLX at these heavily discounted valuations as they transition their business models for another wave of growth. However, my money is going into Meta Platforms.
Not only is FB exceptionally cheaper than NFLX (on a P/E basis), but the company holds a leading market positioning in the sectors it operates (social media & now the metaverse), with no other company even coming close.
5 years from now, I can almost guarantee that FB will be trading multitudes above its price today.
Netflix (NFLX), on the other hand, doesn’t hold an undisputed leading market share in streaming or the gaming segment is attempting to enter. I’m much wearier about NFLX’s future performance with a much higher level of competitive uncertainty.
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