“When value disappoints, markets are mad. When growth disappoints, they are merciless”.
Stocktake quoted that aphorism from fund giant GMO last January, when Netflix shares cratered on account of slowing subscriber numbers, and it bears repeating after last week's bloodletting.
Netflix shares lost 35 per cent of their value on Wednesday alone. Shares have fallen almost 70 per cent since October, when the streaming giant was valued at more than $300 billion.
Just three months ago, Netflix estimated it would add 2.5 million subscribers in the first quarter, only to instead announce it had lost 200,000 subscribers. Worse, it expects to lose two million subscribers in the second quarter.
Clearly, management didn't see this coming. Nor did billionaire money manager Bill Ackman, who announced he was selling his entire shareholding at a steep loss just three months after taking a position in Netflix.
Some might argue the market over-reacted. Losing 200,000 subscribers may sound high, but it's tiny in percentage terms (Netflix has over 221 million subscribers, so the overall number has dropped by less than one-tenth of 1 per cent). Additionally, suspending operations in Russia cost Netflix some 700,000 subscribers.
Netflix bulls will also note it has bounced back before – this is the fourth time the stock has fallen over 60 per cent since 2002. Furthermore, Netflix’s valuation no longer looks intimidating. It now trades on 20 times forward earnings, roughly in line with the S&P 500.
Still, growth investors piled into Netflix because of apparently heady growth prospects, which now look much dimmer than before.
As GMO has noted, growth managers are much more prone to selling a disappointing growth stock “because once it disappoints, the stock truly is a bad fit” – something Netflix shareholders are seeing for themselves right now.
