The financial markets are boiling right now.
We’re seeing record volatility, and people are selling out of tech and growth stocks at a rapid pace. And with the downturn of the Nasdaq, many people think the tech boom could be over.
But as I shared last week, that’s missing a big piece of the picture.
The massive selling of growth companies we are witnessing is due to deleveraging.
Right now, hedge funds are selling off stocks they purchased on margin. Brokers are issuing margin calls… and forcing many of these leveraged money managers to sell their stocks to pay back their borrowed capital.
We are even seeing selling and price decreases in what Wall Street calls the FAANG stocks – Meta (formerly known as Facebook), Amazon, Apple, Netflix, and Alphabet (aka Google). These companies are five industry leaders in the tech sector.
And there’s one FAANG stock I want to look at today that’s been swept up in a whirlpool of deleveraging and tough news…
The Streaming Giant
That stock is Netflix (NFLX). Many of us binge watch TV shows on the platform regularly.
It’s also a staple in many of the broad stock market mutual funds and ETFs, which means it’s likely in many of our retirement or brokerage accounts whether we realize it or not.
Yet the company has been getting swept up in the bad news cycle lately.
In its April earnings call, Netflix reported lackluster numbers… and a loss of 200,000 subscribers instead of the 2.5 million it had anticipated gaining.
As a result, the stock plunged… dropping over 35% in a day.
Last week, Netflix saw more bad headlines as it announced it was laying off 150 employees along with dozens of its contractors – a cost-cutting measure due to its slow revenue growth.
With all this bad news, year to date, NFLX is down nearly 70%. Ouch.
Yet this stock makes a great example of why we have to look deeper in these kinds of moments…
Not the First Battle
There’s always some negative headline that comes out claiming to be the potential undoing of popular tech giants. Yet despite the negativity, Netflix is hardly on the cusp of going belly up.
Regarding the subscriber loss, Netflix shared that part of the issue resulted from the unexpected war in Ukraine, which meant lots of dropped Russian subscribers. Password sharing also came under fire, and the company is making plans to address users who are mooching off others’ accounts.
And while we never like to see layoffs, the cuts represent less than 2% of its employees.
This isn’t the first time Netflix has suffered under a barrage of bad news, either.
When Netflix announced it’d start charging separate fees for its DVD and streaming services, the stock slumped 35%, and it lost around 800,000 subscribers.
ABC News reported, “Netflix managed to make the kind of mistake so massive that people will study it at business schools for generations to come.”
Yet since that time, Netflix’s customer base has grown 10 times and DVDs are nearly a thing of the past.
My point is – the market gets it wrong sometimes.
Netflix started the year by raising prices yet again. And earlier this month, the company executives announced we could see commercials on the platform by the end of the year.
These moves will likely increase revenue in the long run. And when the market stops going crazy, share prices will likely shoot up.
Let’s put this in perspective:
Netflix has faced challenges before – even with severe dips.
But it has always bounced back.
It’s Still the Largest Streaming Giant
At the end of the day, Netflix is still the largest streaming platform there is. The company has nearly 222 million subscribers around the world. Amazon Prime Video has 175 million users. Disney+ has 137 million, and Hulu only has about 46 million.
That means Netflix is still leading the market by 26% over its nearest competitor, Amazon Prime. That’s not an easy feat, especially given the fact that the majority of Amazon Prime video subscribers have it included free with their Prime memberships.
So don’t get too discouraged by the negative news if you own Netflix. Based on the challenges it has faced before, this isn’t the end for the streaming giant.
And now is certainly not the time to dump all your shares while the stock is at or near its low.
Wall Street is deleveraging en masse, and we’ve seen a lot of turbulence in the markets lately, especially in tech stocks.
Once the broader market finishes its sell-off, Netflix will most likely rebound, just like it has in the past.
Editor, Outlier Insights
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