One of the biggest bear arguments against Netflix, Inc. (NASDAQ:NFLX) stock has been the soaring content costs, to which there seems to be no end in sight. Now the company has been steadily raising monthly subscription prices, possibly in order to support its expensive business plan. According to one analyst, that could be an omen of what’s to come at other tech firms, and it has less to do with net neutrality and more to do with long-running public policies.
“Technological deflation”
Analyst Vincent Deluard of INTL FSC has considered the extent to which public policies such as “lower for longer” interest rates and cheap capital are having on the behavior of tech firms, especially those with runaway stock prices. He believes that one of the reasons many tech majors could reduce prices is because they “were not held to the same standards as their old economy counterparts.”
“Many tech giants and unicorns were able to lower prices so much because investors never asked them to turn a profit,” he opined. “Blue Apron’s investors subsidize hipsters to eat boxes of fresh organic food. Uber subsidizes its drivers all over the world to gain market share. In an age of cheap or free money, venture capitalists gladly burned investors’ cash in the hope of finding the next Google. But unicorns will need profits when rates normalize. That will require higher prices.”
Of course, it’s not entirely about price cutting among tech firms. We would add that even companies such as Tesla, which isn’t known for having low prices, are benefiting because investors haven’t been demanding profits from them.
The “curious case” of Netflix stock
In particular, Deluard focused on Netflix stock and its resulting market capitalization as an example in his December report entitled “Will Unicorns and Robots Kill my Case for Higher Rates?” However, he warned that we could about to see prices rise across the technology sector.
The soaring value of Netflix stock has added about $51 billion to the company’s market cap since 2014, he said. Meanwhile, the combined capitalization of Walt Disney, CBS, Time Warner, Discovery, Viacom and Twenty-First Century Fox has declined by about the same amount, he added. Further, Netflix’s operating cash flow over the same timeframe has been -$3.6 billion, while the company’s “six old economy rivals” generated $89 billion in operating cash flow.
He describes this situation as “curious” because investors have been pouring money into the streaming firm without requiring it to make a profit.
Why has Netflix stock soared without profit considerations?
According to Deluard, public policies are partly to blame for the runaway value of Netflix stock and others despite their cash-burning habits.
“In an era of financial repression, investors and venture capitalists only looked at the top line: growth at any cost was the mantra of the time,” he wrote. “ZIRP and QE gave us Blue Apron, a company that spends about $463 to acquire one customer, when the average customer delivers a profit of just $102 over three years.”
He also warned that the future doesn’t look so bright for tech firms that have been riding the momentum wave without consequences for a lack of profits. He believes that when interest rates do finally normalize, “investors will not be so willing to bleed money in the hope of elusive profits.”
Another problem for Netflix stock
Another potential problem for Netflix stock has also arrived on the scene: the end of net neutrality. In part because of it, famed short-seller Jim Chanos told CNBC on Thursday that he was considering a bet against the streaming firm. He also mentioned competition and costs, two other issues bears have been beating the drum on for quite some time.
Chanos noted that Netflix said it opposes the Federal Communication Commission’s move to end net neutrality, even though it has said for years that it wouldn’t affect its business. He questions the mixed messages. Further, he pointed out that analysts generally assume most of the recent price increase announced will flow down to the company’s bottom line, but he believes the increase could actually be to offset rising costs. Netflix’s content budget is now $7 billion to $8 billion per year, although this is expected to increase thanks to the Disney-Fox deal.
Data from financial analytics firm S3 Partners doesn’t yet show an increase in bearish bets against Netflix stock since the recent short interest peak earlier this month, but it’s only been a day since the FCC’s final decision was announced.
Netflix stock shrugged off the concerns about the end of net neutrality on Friday, rising by about 0.5% to as high as $191.43 in intraday trading.
