Netflix (NFLX) was once a market linchpin, but its growth stopped impressing a lot of investors years ago. Now we see where the story ends.
It isn’t in complete obscurity. Millions of households are still in the thrall of this channel, paying $2.5 billion a month for exclusive movies and shows.
But sooner or later, that audience was going to stop expanding at any significant rate. That’s happened now.
And for people who thought Netflix could one day claim a legitimate place in the company of Facebook (FB), Amazon (AMZN) and Google (GOOG), that’s a real problem.
They kept diversifying and evolving. The stocks kept reaching for the trillion-dollar stratosphere. Netflix, the “N” in the “FANG,” stuck to TV and barely got above $300 billion before starting over a cliff three months ago.
Evidently there’s only so many people in the world willing to pay for TV . . . and only so many hours in the day for them to spend glued to the screen, no matter what’s playing. That isn’t going to change.
Say farewell to the FANG. Three of its constituents have shown us that they can grow beyond their origins. Netflix is struggling.
Product And Platform
You probably noticed that I referred to two of the FANG stocks by their old names to make a point. The “F” has become Meta Platforms and the “G” is now officially Alphabet.
While they’ll remain closely identified with their original social network and search engine for a long time to come, their management teams were smart enough early on to invest in what Alphabet calls “moon shots,” the fringe research programs that can seed new businesses.
And Mark Zuckerberg bought into virtual reality in pursuit of a “metaverse.” But he also signed off on buying Instagram and WhatsApp in order to develop a footprint larger than his original website.
For our purposes, it doesn’t even matter if any of these side bets pay off in our lifetime. The important thing is that Alphabet can one day become more than search engine advertising and Meta is more than Facebook.
It’s been a long time since Amazon was just an online bookstore. All the books in the world wouldn’t support what is still a $1.4 trillion stock even after its 20% retreat.
It took books plus music plus streaming media plus cloud computing plus Whole Foods to justify that market capitalization.
Netflix has the streaming media side covered. They evolved beyond DVD rentals to produce their own programming . . . but that’s a vertical integration, not widening the footprint much.
Whatever market math prevails, Netflix will only be a streaming media company unless it finds a strategic fit elsewhere to buy or bolt onto that business. That’s the limitation on its shareholder “sky.”
Don’t get me wrong, that business might once again add up to a $300 billion stock some day. But it’s vanishingly unlikely that shareholders will end up with anything like an Amazon or quintuple their money along the way.
Who knows where Amazon goes, for that matter? There may be new products locked up in that platform that we don’t know about yet.
On the other hand, Amazon itself might be close to a long-term top, or at least in a zone where real growth gets grudging. Can it double again in our lifetime? Revenue is still rising 17% a year, so ask me again around 2026.
Meta is wide open. And in theory Alphabet could hit the moon one of these days, if the management team stays focused and connects with the right opportunity.
After all, Apple and Microsoft have showed that they can crack the market ceiling and keep growing. I’m not convinced that they will grow like this forever unless they make a big radical move like building their own cars . . . but they’ve each demonstrated that they think in those visionary terms.
Apple is a lot more than the computer company that developed a cult audience a generation ago. It’s an ecosystem. And as Microsoft flexes to buy one of the biggest game developers on the planet, it’s a lot more than the software company that almost killed Apple in the 1990s.
Again, I’m not convinced that they’ll double again in the next decade, but they’ll definitely keep innovating until they hit their own creative wall . . . wherever that may be.
One-Trick Stocks Beyond The FANG
But what about other stocks? The whole promise behind Tesla (TSLA) is that it’s theoretically more than electric cars.
Excluding TSLA, every car maker on the planet is arguably worth no more than $3.5 billion put together. That’s the size of the car industry.
Under normal conditions, it’s big enough to support a lot of companies. But it isn’t growing fast. Just about everyone who can afford a car and needs one can find one.
Cars wear out. There’s a routine replacement cycle. But TSLA is a $900 billion company, implying that it will ultimately capture about 25% of that cycle . . . becoming three times as prominent as Toyota in the process.
Maybe. The follow-up question is where the stock goes from here. Can solar panels and home batteries create the kind of transformational expansion that we saw when Amazon transcended the bookstore?
Again, the answer is maybe. Dominating a second product category can point the way to a Tesla that’s a lot more than cars . . . and a lot bigger than $900 billion. In the meantime, people will argue.
Smaller companies have more existential challenges. Peloton (PTON) isn’t a lot more than subscription content on proprietary exercise bikes any more than Krispy Kreme (DNUT) was more than doughnuts . . . or TiVo was more than a video recording system . . . and so on.
You need more than a single product to grow beyond a certain size. For most of us, that’s a worthy objective in itself, but when your stock price assumes total category domination, you need to give Wall Street more.
We’re starting to see some of the more visionary bulge bracket tech founders trying to come up with that second act. Look at Jack Dorsey, leaving Twitter (TWTR) as a one-product company in order to focus on Square (SQ), which has more expansion potential throughout the financial arena.
Like Mark Zuckerberg, he changed the name of his company to widen its horizons. I like his odds.
Ultimately names like Roku (ROKU) will face this choice. I think they’re facing it now. You can’t be satisfied creating a new industry or pursuing a single business plan . . . no matter how innovative or profitable it is.
We’ll see a new generation of winners emerge as people try the obvious combinations in order to figure out the best fit. Maybe one or two will survive to join the trillion-dollar club.
Buy one when it’s only a $40 billion baby and that’s an exciting prospect, don’t you think? It’s worth accepting that several will “only” go to $100 billion or even $300 billion and then stall.
IPO Sizzle And Defensive Strength
It’s a savage season for IPO investors. You either need long-term vision to hold on through these cycles in the market . . . or you probably shouldn’t be in these stocks at all, no matter how spectacular their ultimate destiny turns out to be.
The Renaissance IPO index has now dropped 42% from its February peak, retracing all the way back to where it was 17 months ago. I know it will recover and make high-conviction shareholders happy, just like it always has before.
The recovery can start in a heartbeat, which is why I’ve been a net buyer in my IPO Edge portfolio. However, if this Fed shock plays out like the last one, it could take months or even a few years for the bulls to regain their confidence and get back to work breaking records.
For now, patience is the highest virtue while stocks that plunged 30% from their first-day price or more (like about half of all IPOs that went public last year) heal from their wounds. If you bought on the open market, you aren’t going to get a lot of instant gratification.
That’s okay. I love these companies for what they can do over years or decades. By the time they mature like Amazon and Tesla and endless other stocks, today’s selling will be a footnote at best.
So what do we do while we’re waiting for the wind to turn? As remarkable as it sounds in this start-up-dominated space, a few of the companies that go public in any given year are mature enough to pay dividends.
They’re not technology companies or biotech drug developers. They have solid revenue and are efficient enough to distribute significant profit to shareholders.
After all, banks and real estate companies and the private equity firms themselves all need to go public sooner or later, right? And if you’re pressed for patience in a gloomy season, their quarterly payouts can be an enormous comfort.
We’ve done well on dividend debutantes in the IPO Edge. One of them, FS KKR Capital II, went public in mid-2020 and was reabsorbed into its parent FS KKR Capital (FSK) a year later.
It paid dividends all along. Even now, the chill on recent stocks gives new shareholders a chance to lock in the equivalent of an 11% cash yield for the foreseeable future.
There are a few REITs that are also interesting. They own plenty of property and collect a lot of rent. The IPO storm has pushed a few to an 8% to 9% yield, which looks sustainable.
I’d lock it in myself but think these stocks can fall farther before the market mood recovers. Then there’s Israeli shipping company ZIM, which has paid over $2 per share quarterly since its debut.
Admittedly 25% of that payout goes back to Tel Aviv tax authorities, but it’s still hard to turn down the equivalent of 12% after taxes. And there are other fresh stocks on my screen that haven’t even announced a dividend yet . . . but they’re profitable enough to start rewarding shareholders now.
If you’re looking for instant gratification or just a pin for your patience, these stocks are the place to start.