Netflix implosion - the two sides to active investing.

What?

Netflix has dropped nearly ~50% since it hit its peak in November 2021, wiping out more than $200bn of market value. It dropped more than 20% in just one day last Friday after it reported earnings that disappointed investors.

Why?

While the streaming giant beat on both the top (revenue) and bottom (profit) lines, and reported 8.28M global paid net subscriber additions in Q4, its guidance is what really hit sentiment. Netflix expects to add just 2.5M subs this quarter, short of the 3.98M it added in Q1 of 2021, and far below the nearly 7M expected by analysts. It would also mark the slowest start to a new year for the company in at least a decade.

Bottom line: Even a company + service as incredible as Netflix eventually has to slow down, and the market had gotten ahead of itself pricing Netflix’s impressive past growth numbers into eternity.

An interesting chart:

In the chart below you can see, somewhat incredibly, that Netflix (NFLX) and the Nasdaq 100 Index (NDX) of which it is a part, have given almost exactly the same returns over the past 5 years - 179%. However, the paths to those returns have looked very different. The Nasdaq Index has had a smoother journey, while NFLX has seen multiple drawdowns of more than 50%!+

The other side of the coin

Investing in single stocks does come with its own benefits, the main one being the possibility of outsized returns. Or phrased another way, you can never beat the market by just investing in the market as a whole via an index. Just in this scenario, for example, if you zoom out to the past 20 years the returns look very different - If you had invested in Netflix on the day of its IPO and held till today, your return would have been ~37,000%! The Nasdaq over the same period returned “only” ~1100% (12x).

Hindsight is obviously 20/20, however. Could you have held on through that ride?

Implications:

As an investor, what you have to decide is:
1. Whether market returns are sufficient (12x in 20 years in this case)
2. Whether you’re willing to spend the time required to understand the stocks you’re investing in
3. Whether you’re equipped to actually understand the risks you’re taking
3. Whether you have the emotional wherewithal to ride the volatility that comes with single stock investing

You know where we stand at Mintd.