About four months ago, I made a prediction that Netflix (NFLX) was about to replicate the cryptocurrency curve in terms of valuation, or more appropriately, overvaluation:
My estimate for BTC’s value is close to $0 (but not exactly $0). NFLX on the other hand at least produces something not easily replicable, so while it may not be valued close to $0, I concede it is worth something, just something more reasonable than $490/share. In a sane market where cheap loans are not in abundance, its value is close to $40-80 (for a price-to-earnings ratio in a more reasonable 5-20 range).
Sure enough, today it has broken the 300 mark in the opposite direction, from $440/share. Not a surprise based on everything I’ve said about Netflix up until now. While this represents a 30% drop from its peak, it is nowhere close to the rational valuation of $40-80/share. Just like how BTC went from $20,000 to $6,000 in a heartbeat, there’s no underlying fundamentals that would save NFLX from experiencing the same fate in a very short period of time.
In fact, its latest earnings report issued the same propaganda, and the 10% pop it experienced was erased in less than 24 hours after its release. The subscriber schtick is wearing thin and unless Netflix can reverse its binge borrowing habits that freeloading users love taking advantage of, I predict Netflix staying in its downtrend for a while (see Debunking Netflix stock price propaganda: Subscriber Growth™!).
Netflix has simply found a way to cook the numbers while not actually, well, cooking the numbers. When you ax the fluff of freeloading users and get down to actual profitability, Netflix is a huge loser. But it doesn’t want to scare the gullible speculators and mindless retail investors like that. Instead, they will report on subscriber numbers, a deviation from standard practice, to mask what’s really going on with the debt-ridden company. The traditional profits, assets and liabilities equation is apparently too passé to apply to tech stocks.
One tech stock that did somehow turn a profit despite a significant decline in usage is Twitter (TWTR). If subscribers (or regular users) is such a hot metric in measuring future profitability for tech stocks, why didn’t TWTR react in the inverse manner of NFLX subscriber reports?
The inconsistent short term market reactions indicate that there is still a lot of irrational hype surrounding tech. Fundamental value does not make up the valuation of many of these stocks. Social media companies — companies that literally produce and contribute nothing to society and in fact are detrimental in the long term for an economy (see anti-social media posts) — are way overvalued, particularly FB and TWTR. A stock like SnapChat (SNAP, down 10%+ on the day) at least shows a more realistic expectation for these fads waiting to die. The declining usage of Twitter in addition to its formerly negative price-to-earnings ratio to its current whopping 100+ PER are both giant warning signs of extreme overvaluation. The rise of alternative, leaner, and less censorious platforms such as Gab.ai also threaten to chip away from the current social media user base.
Couple all of this with the macroeconomic factors at play such as bond markets and interest rate hikes, and speculators and retail investors are beginning to feel their stomachs drop as we descend over the first hill. This roller coaster ride is just getting started.
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Tell me what you think of the tech bubble. Will we see the resurgence of cheap money just to save over-inflated asset values? Drop a comment and subscribe for more rational perspectives in an irrational world.