Sean Hathaway

I am the owner of this site.

Q2 2022 – Finance Market Update

July 17, 2022

Stocks & Markets

Painful first 6 months of year…worst start for US Stocks in 50 years. If you read nothing else from here forward, this short video sums up the quarter nicely. 😂

Times like this reinforce the need to have a financial plan in place and stick with it. 

Let’s take a step back though and consider the following: If you invested $10,000 on Jan 1, 2017, you’re still doing VERY well. Hard to believe, but it’s true. If you were in technology, you’re killing it, and even if you were in conservative value stocks, you’re doing just fine. 

* FATMAANN = Facebook, Apple, Tesla, Microsoft, Amazon, Alphabet, Netflix, Nvidia

Government stimulus and Fed actions drove massive market mania in the last couple of years. Many (including me!) feel a huge sense of loss recently, but if you step back and just look over the last ~5 years, returns are healthy and markets appear to be normalizing.  

Said another way. 

Inflation

I wrote about inflation being a concern in my Oct 2021 newsletter and at that exact time our Treasury Secretary was still calling it “transitory”. The Fed didn’t begin raising rates until March 2022! AND the Fed was still buying securities in the open market (i.e. Quantitative Easing) to the tune of $20 billion in March 2022! Here’s their last purchase

Why am I showing you this? Because it’s crazy. The Fed was still buying Treasuries when inflation was rampant. The government issues debt (i.e. treasuries) to fund expenditures, and then the government (the Fed) buys them. Printing money. 

Now we are all paying the price…high prices!

Below is year-over-year inflation in June compared to September:

Our government overspent and the Fed fell asleep at the wheel. 20/20 hindsight I suppose. I like Ray’s Dalio’s take. My favorite punchline: 

“…while tightening reduces inflation because it results in people spending less, it doesn’t make things better because it takes buying power away. It just shifts some of the squeezing of people via inflation to squeezing them via giving them less buying power. The only way to raise living standards over the long term is to raise productivity and central banks don’t do that.”

In short, The underlying US economy and demand is strong and that’s a great long-term outlook for markets. Job openings of 6.9% continue to exceed the unemployment rate of 3.6%; a very healthy economic indicator.

What Happens Next? 

Many experts predict a prolonged bottom and more pain to come. Why? 

So much uncertainty: (1) war in Ukraine, (2) supply chains (3) inflation and recession worries and (4) Fed actions. Now there may be a (5): Emerging Market Debt Crisis. Did you see the videos in Sri Lanka? More to come in other countries.   

Action Items for Investors 

  • Have a plan, stick with it and don’t try to time the markets. 
  • That said, historically we see big down turns every ~10 years: 2000, 2008 and 2022. These are historically great times to invest. 
  • Dollar Cost Average in NOW. Keep buying slowly and consistently. We may not be at the bottom, but 5 years from now you’ll look back and be glad you were buying!

Other stuff

Housing

The median U.S. home price rose from $160k in 2010 to $418k!! Bubble? Stay tuned and be careful. 

Crypto

Crypto is not a hedge to equities, as many promoters claimed. Seems it was more a speculative investment for excess capital. Check out the correlation of crypto exchange company Coinbase to Bitcoin value below.  

Countless stories if you’re interested from the collapse of Terra Luna to one of Crypto’s most important hedge funds 3 Arrows. In retrospect, this all seems so obvious. 

Twitter

Elon backs out of his purchase of Twitter. I think they’ll simply negotiate a lower price and he ends up buying it. He did waive due diligence, but Twitter likely disclosed inaccurate data in public filings around DAU’s and fake/bot accounts. We’ll see what the Delaware Chancery Court decides. 

On a related note, it is clear that Elon sincerely cares about Twitter and its importance as the public town square. Further, he essentially provides an MBA course on how he is going to turn the company into a powerhouse during the Elon Musk all-hands meeting here

Netflix

Near and dear to my heart. And boy has Netflix been in rough waters losing subscribers and stock down 73%! But, there are reasons to be hopeful: 

  • Ads. They have partnered with Microsoft to roll out an ad-supported tier. 
  • Password sharing. Ads will also facilitate their crackdown on the 100+ million password sharing accounts. Now they can gently nudge non-paying households to the ad-supported tier.
  • User-generated Content. Finally, with advertising, and TikTok eating their lunch and others’, there are strong arguments to move into “user-generated content”. 
    • User-generated content will drive billions in ad revenue. $6.9b for YouTube last quarter alone. The content is “free”, so the margins are enormous. 
    • It’s an engineering challenge, which is why it’s a perfect area for Netflix to engage; and near impossible for traditional studios to follow.
    • 100’s of million, maybe a billion, people already have the Netflix app on their phone! Heavy lifting done.
    • Netflix lost my teenagers and a lot of Gen Z. The mission to “Entertain the World” should logically include user-generated content. 

Recommendations

Breakaway Podcast. Check it out and come be a guest.

Take care! 

Be kind. Be positive. Persevere.

Sean 

www.HathawayFinancial.com

Twitter: @seanjhathaway

#55 – Mkts, Inflation, War, Politics, Energy, NFLX, Twitter, Musk, TSLA

Markets, Inflation, War in Ukraine, Politics, Energy, Netflix, Twitter, Musk, Tesla

Economy/Markets

Inflation print

CPI at 9.1%

What now: 

War, Supply Chains, Inflation (supply driven), and Fed actions.  

Are we in a recession? Yes.

Politics: 

  • 70-80% of americans in general agreement. Then the wacko’s come out and ruin everything. 
  • Climate change or die! 
  • Energy. 50% st fix and 50% lt strategy. Solar. Nuclear. 
  • Abortion.

Netflix

  • Bad guide. Stock down 75%. 
  • Partnering with Microsoft for ads
  • TikTok kicking Netflix’s ass…so why not compete head on. 

Cheap Stocks

StitchFix down 95%. Bill Gurley buys $5m of StitchFix. 20x return if it goes back. That’s the good news. Not a recommendation but lots of depressed stocks like this.

Twitter/Musk

As for Musk himself, the CEO had said in an email a few days earlier that he would spend six days a week in the factory, “seven if physically possible.” In the email, which The Information reviewed and which hasn’t been previously reported, Musk added, “BTW, anything I ask others to do, I do myself even more.”

Tesla

  • All automakers down today. Watching this guy say that Tesla will “revert to mean” of other company valuations. No they wont. 
  • Solar, Battery, Cars, AI, HVAC, Semi’s, 

Entertainment

  • TopGun
  • Tour de France. 
  • British Open for Golf. Tiger shot a 78. 

#54 – Austin, Markets, Housing, Elon/SpaceX, Elon/Twitter!

Austin Texas bachelor party. I love that town. 

Dr. Emperor of masks and vaccs Fauci has Covid; and he’s been vaccinated 4 times. 

Chesa Boudin the progressive DA of the most progressive city was recalled. Are people actually getting tired of crime? 

Markets: 

  • S&P down 23% and Nasdaq 100 down 30%. 
  • Fed just raised 0.75% this week. First time since 1994. Now we’re at 1.75%. 
  • Inflation. Gas. War. 8.6% 100% up for gas. News flash: interest rate hikes don’t drive gas prices down. 

Credit card companies make a lot more money when gas prices double. Their revenue doubles. Buy Visa and Mastercard?

Housing: 

  • In Jan 2021 30 yr mortgage rate was 2.65%. Avg home price $402k. 
  • Today. 5.78% and $570k. 
  • 20% down payment. Monthly payment is $1,294 to $2,671. 106% increase. 
  • Rates are 3% higher. So $500k loan. $15k/year or $1,250/mo. 

I personally just saw more houses for sale on Zillow in my neighborhood, more than ever. 

USA Today removes 23 articles after a reporter fabricated sources. USA today is allegedly a “fact checker” for Facebook and possibly Twitter. Musk at Twitter All-hands.  

Elon Musk: 

SpaceX fires employees. No woke ass bullshit!! 

NYT reporting on letter. Brian Armstrong

“The letter, solicitations and general process made employees feel uncomfortable, intimidated and bullied, and/or angry because the letter pressured them to sign onto something that did not reflect their views,” Ms. Shotwell wrote. “We have too much critical work to accomplish and no need for this kind of overreaching activism.”

Twitter: 

  • So casual. Looks like he is on iPhone and some dude walking around in kitchen in background. 200m daily users. 7.8b Gap. 8b in world. Wants 1b at least. 
  • How to verify. $3/month. 
  • Payments. 
  • Entertaining advertising.
  • Video: Talk about how to make Twitter better! https://www.youtube.com/watch?v=FLvTcRrzy20
  • Video 2: How do you define success. 

Netflix take some lessons! TikTok!! 

Electrician and immigration. 3 strategies: 

  • PHD’s. 
  • Lower labor. 
  • Refugees. 
  • AND Strong borders. 

Tesla stuck in the mountains. https://twitter.com/ShowersJacob/status/1537556676558979072

#53 – Mike Greene – CEO of Resi-Shares & Real Estate Expert

Mike Greene – CEO of Resi-Shares & Real Estate Expert

Mike Greene is innovating and changing the future of single-family home investment opportunities! 

Mike Greene is the CEO of Resi-Shares; a firm that is leveraging data, technology, and financial innovation to deliver systematically diversified appreciation and rental income from single family homes.

Mike and I go back a long way having attended the MBA program at UC Berkeley.  

Mike has worked his entire life in real estate including sell-side banking, buy-side and finally at HouseCanary, a company leveraging big data and AI to provide actionable insights on real estate. 

In this episode we talk about: 

When Mike co-founded his business Covid hit and he thought it would be a perfect time to invest in single-family housing, but the markets sky-rocketed and real estate prices went up. Turned out the timing was terrible, but like any great entrepreneur he persevered, learned a lot and survived! 

What his company Resi-Shares and other institutions are doing in the real estate markets: BlackRock, BlackStone, and investing in real estate investment trusts (REIT’s). 

We spend a lot of time talking about Bay Area real estate (at my admittedly selfish request). 

  • Should you buy or rent?
  • Should you sell or rent if you’re moving? 
  • What’s going to happen to Bay Area real estate, given economy and interest rates.  

We’ve seen a migration out of California, but housing consistently goes up in price. We dive into the why. 

Recommendations discussed: 

The Netflix Flash Crash

  • Stock price down 70%. From a high of 690 to 210.
  • Netflix has given back 4 years of returns in 5 months.
  • Losing subscribers! 
  • HODL or sell? 

Full disclosure, I wrote that Netflix could continue growing and increase to a price beyond $600 7 months ago. I still believe it, but it’s going to take longer and it’s going to require renewed focus and execution. The issues I raise below, have surely been debated ad nauseum by Netflix management, but clearly what they’re doing is not working. 

There have been strategic misses: 

  • Raising prices last quarter was NOT a good idea. 
  • Content quality and release strategy needs adjustment.
  • Management hubris, as demonstrated on January earnings call. 
  • Lack of willingness to experiment: Sports, Gaming, Advertising, Acquisitions.
  • Wokeness. And pulling out of Russia (controversial take here). 

Here is the good news: 

  • Secular trends – cord cutting and on-demand viewing – are still in their favor.
  • They now are expressing willingness to try new things: Gaming, Advertising and cracking down on password sharing.
  • Scale. They have a huge lead in global original productions and technology infrastructure and they are still the leader in Global Streaming.
  • Management team.

Price Strategy

Netflix is always raising prices and this is generally fine, as long as we (customers) feel there is value. However, they were too aggressive this time. They went into their Q4 earnings call with weak Q1 guidance AND made the decision to raise prices. Management explained on the call that it was a net positive for revenue, but that misses the point. They need to accept that the Street wants subscriber growth. Netflix is constantly trying to guide analysts to focus on revenue and not subscriber numbers. It’s silly at this point, because we all know subscriber numbers are the best indicator of growth in the business.  

Maybe it was “good” for revenue, but management should weigh that against the destruction of shareholder value in the stock price, which dropped 30% after the Q4 earnings call. There will always be some churn when you raise the price, but be smarter about it! 

Finally, I think they need to lean more into lower prices in emerging markets. Pull the customers into the eco-system, and then improve content over time and then raise prices.

Content

I’m going to stay high-level here, but I think most people would agree with a couple things: 

  1. Netflix Movies are watchable, but completely unmemorable. They’ve been at it a long time now. Why can’t they get it right? As a simple example, the Ryan Reynold movies (6 Underground and The Adam Project) were ok, but I’ll bet nobody watched them twice. 
  2. Release Schedule. It’s past time for them to start staggering content releases. A simple example would be releasing a 10 episode season in chunks of 3-4 episodes over a few months. We don’t need to binge all 10 episodes. Or even go weekly. This is so obvious at this point! It would reduce customer churn. 
  3. Franchises. This is a tough nut to crack because franchises take years/decades to build. Disney has a war chest with Marvel, StarWars, Pixar, etc… I think Netflix missed a valuable opportunity not going after MGM, which Amazon acquired for $8.5 billion. Imagine the enormous library of old content, plus the ability to continue and revive existing franchises/IP, like the 007 Bond franchise! They could have developed 009 the female agent, or Bond as a teenager. They could have resurrected the Pink Panther franchise or Thomas Crown affair or G.I. Joe. Ideas are limitless. Complete miss! 

BTW, I’ll concede on this last point that it’s “more complex than that”. There are complicated licensing issues and apparently the original family that developed “Bond” has veto rights, blah blah, blah. It just seems Netflix management always talks themselves out of these risky acquisitions. But they take huge risk trying to develop their own franchise in Jupiter’s Legacy. I was so excited, but it was unwatchable and canceled after Season 1.

Management Hubris

As an admirer of Netflix management team, it pains me to say this, but their Q4 earnings call on January 20 was embarrassing to watch. They seemed surprised at the market’s negative reaction to pathetic Q1 guidance. They also seemed unprepared to explain the issues surrounding lack of growth. The tone of the video call was completely “off”; management cheerful and positive, while the street is chopping 30% off the stock price.

The Q1 earnings call last week was much better. Appropriate tone and prepared to talk about the issues.

In trying to zoom out, what worries me here is perhaps management became complacent in their dogmatic strategy of the last decade. Now competition and saturation have emerged and they need to adjust. BTW, they need to update their Long Term View. It’s dated and has no mention of gaming or advertising.  

The good news here is I think they recognize this is a 5-alarm fire, it’s all hands on deck and decisive action needs to be taken. I have faith that Reed and Ted can make this happen. For long-term followers, this is a repeat of 2011 DVD split; but worse. Reed fixed it then and he’ll die trying to fix it now! 

Willingness to Experiment

Gaming. Good. In process. We’ll see.  

Sports. I have long stated that I think Netflix has (now “had”) a great opportunity to utilize their technology prowess to bring much needed innovation to sports programming. They have consistently steered away and Ted again on this earnings call said they don’t see a path to profitability in that space. Well now Disney, Amazon and Apple are all going big on sports, so it’s likely too late anyhow. 

Advertising. I’m glad they are experimenting. I wish they would have done it sooner. I think it’s only appropriate in emerging markets. This will be a tough needle to thread. Risk is cannibalizing paying customers, and then getting addicted to ad revenue and inundating us with ads. 

Acquisitions. See MGM above…big miss. I’m glad they are open now to gaming.

Wokeness and Pulling out of Russia

This is where I may get canceled, but needs to be said. 

Wokeness: There are thoughts that the Netflix decision makers based in LA (one of the most liberal cities in the US) are allowing “woke” politics to influence programming too much. Did anyone actually watch Colin Kaepernick’s Netflix special? And now he’s trying to get back in the NFL! To Netflix’s defense I applauded Ted Sarandos defense of Dave Chapelle. But even Elon Musk has weighed in on the matter: 

In summary here; Netflix should stay out of politics. Take a page out of Brian Armstrong’s play-book (CEO of Coinbase). The quick backstory is during the 2020 woke madness and employee uprisings, he told employees that at work we are focused on the mission, not politics. He took a lot of heat at the time and lost about 5% of his workforce, but he says Coinbase is much stronger as a result. Great recent interview with Brian here and Netflix discussion as well.  

Netflix needs to focus on the mission: “At Netflix we want to entertain the world.” 

Russia: Netflix just walked away from a population of 144 million people; maybe 40 million households; resulting in a loss of 700,000 subs. Obviously, the war Putin is raging against Ukraine is horrendous and criminal. But it’s not entirely clear to me how canceling Netflix in Russia helps. Yes, it’s a sign of solidarity with the world that we will stand against Russia. But it’s also simply a virtue signal. A costly one. 

I don’t think Putin gives a s**t about Netflix; and he is the aggressor and decision maker. As a shareholder, I’d prefer to be collecting fees from 700,000 and growing paying customers in Russia; they’re not responsible for Putin’s madness. Further, if you want to induce economic harm, you could argue that we should have kept Netflix “on” in order to extract $’s out of the country.

When this conflict eventually ends, hopefully Netflix will be able to simply switch it back on. Worth noting there are other complex issues in Russia, like their requirement for Netflix to carry local TV.

The Good News

Secular Trends

For years we’ve been talking about how there are 600 million global households (x-China) and growing. Everyone is cutting the cable cord. This trend didn’t simply change in the last 4-5 months. Competition is strong in the US and growing more internationally. But it’s unlikely there will be 20 apps or services that everyone pays for. There will be consolidation and Netflix will likely be one of those Apps that most people choose to pay for. 

New Strategies

As stated above, it’s good that they will now experiment with gaming and perhaps advertising. 

Cracking down on password sharing is long overdue. They claim there are 100 million or more non-paying households; 30 million in US/Canada.  Netflix is a tech company and I think they can accurately estimate the number. I just hope they move fast on shutting down the sharing. If they can capture ½ those house holds over the next 2 years, that is 25 million new subscribers per year! 

Scale

I’ve written about this before, but Netflix has done a phenomenal job at building out its international operations at scale. At this point Apple and Amazon are probably close to them in terms of international technology stack and ability to deliver streaming globally. 

But Netflix still has a big lead in producing international programming, dubbing, subbing and making that programming available in all regions. The best example of this by far is obviously Squid Game, a relatively low budget Korean series that became a global phenomenon. Ted also mentioned their global Spanish hit Money Heist, would now have a Korean spinoff. It’s likely we’ll see Squid in other countries as well. Point of all this is Netflix is at scale and can create content that travels globally at better efficiency (i.e. lower cost)  than other studios (for now).  

Finally, legacy media: Warner/HBO/Discover, NBC/Peacock, CBS/Paramount and Disney, although they are moving fast into streaming they are cannibalizing their existing advertising cable dependent businesses andl face cost pressures and internal cultural adaptation issues. 

Management

Reed Hastings – Founder and co-CEO – 25 years

Ted Sarandos – co-CEO – 22 years

Greg Peters – COO – 13 years

David Hyman – General Counsel – 20 years

4 officers of the company with 80 years combined experience. Could work both ways. Maybe they need to mix it up. But, I’d err on the other side: I think they know how to work well together, move fast and course correct. They were all there in the DVD days and pivoted successfully.

In Closing

Netflix can have no more net subscriber loss quarters. They guided to negative 2 million in Q2, but I’m hoping they’ll pull a rabbit out of a hat and be up slightly. They need a couple of big content hits. In terms of predictions: I don’t think they’re going to see the $600 range for a very long time. I hope I’m wrong. 

Macro-economic conditions aside, the real question is will analysts begin to value them like 

traditional media? If so, they’re screwed, because then you’re looking at price-to-sales ratios of 2-3. Netflix is at 3.2 now. But for context Amazon is also at 3.2 and Disney is 2.9. So guess what: One could conclude Netflix is fairly valued today! 

Prediction: Netflix finds their way and climbs back north to $300 by year end. Or if their Q3 content slate and guidance is not good, they could be cut in ½ again; markets are vicious! 


You can find me sean@hathawayfinancial.com 

Sell your RSU’s

Most people hold their RSU’s (Restricted Stock Units) too long. 

By holding and not selling your RSU’s you’re effectively betting that your company’s stock will outperform alternative investments like other stocks or the overall market. You might be right, but that’s a big bet most people shouldn’t lay down. You’re also increasing your investment risk profile substantially. 

Drinking the Kool Aid? Availability bias? Blind faith? Or simply, not optimizing your investment portfolio. 

So I have a lot of friends who work at public companies in the Bay Area. In all of these companies equity in the form of RSU’s is a significant portion of compensation.

The vast majority of people I know hold their RSU’s long after they have already vested. In fact, their vested RSU’s are often a material portion of their net worth.

Punchline: You should sell at least some of your RSU’s on the day they vest. If you want to hold onto 10%, 20% or even 50%, fine. But holding 100% is likely irresponsible. 

You can stop reading now and take my word for it. Or more detail follows…

Why sell my RSU’s?

There are two main reasons:: 

  1. Diversify your portfolio and lower risk. 
  2. Maximize return.

Diversification

“Diversifying Well Is the Most Important Thing You Need to Do in Order to Invest Well”

  • Ray Dalio – Founder Bridgewater Capital

Here is more of Ray’s very easy to understand reasoning around diversification.

Nobel prizes have been awarded to researchers, economists and academics on the benefits of diversification. There is no reason for me to go deeper on it here when you can read about it everywhere. In short though: Diversification increases returns while simultaneously decreasing risk. Win. Win. 

It should be intuitive that holding investments in five companies is better than holding stock in one company if you want to maximize your chances for a comfortable retirement. 

Finally, holding your employer’s stock concentrates risk from a paycheck and investment portfolio perspective. You’re reliant on your paycheck and appreciation in your company’s valuation.

Maximize Return

If you hold your RSU’s, you are betting that your company will return more than alternative investments. THIS IS A BIG MISS.

If you live and work in the Bay Area and had the luck/privilege to work at one of the few companies that has experienced outsized returns (Nvidia and Tesla come to mind) then bravo. But why not own more than one? Own Nvidia, Tesla, Alphabet, Amazon and Apple. If you owned all five you would have returned 15x over the last 7 years. That’s an insane return.

BTW, I know I can pick the companies and make the data/conclusions do anything. Point is, it’s hard to pick the super winners, and you’re generally going to maximize wealth and sleep better with a basket of companies. 

Taxes & Timing

There is a reason to sell on the day of vest. When your RSU’s “vest”, they actually become unrestricted and are fully transferable shares of stock. The vesting day is also a taxable event. You are taxed on the day of vesting at ordinary income tax rate. Most companies will withhold ~40% of the vested shares to pay taxes. So if you vest 1000 shares, you actually may only get 600 shares.  

From that date forward the appreciation of those 600 shares will be taxed as either short-term (held less than 1 year) or long-term capital gains. So on that day – the vesting day – you can trade those shares out for shares in other companies that will also be taxed at capital gains. 

The point here is that if you’re going to diversify, you may as well do it on the vest date so there is little to no tax consequence. 

Ping me with any questions at sean@hathawayfinancial.com

Tesla vs. White House

Tesla joins the $1 trillion club. Stock soaring at all time highs on record deliveries, high margins and insatiable demand.

But is the White House hamstringing them? 

Shouldn’t we be celebrating the most visionary business leader of our generation leading the most impactful clean energy company in the world? 

It is not my intention to wade into partisan politics; but just to highlight the hypocrisy and paradox we see intersecting politics and business. Personally, I feel like Biden should be calling Elon Musk to congratulate him on so many levels. 

Previously I wrote on how Tesla is on the way to becoming the most valuable company in the World. 

But instead, this happens: 

  • Today National Transportation Safety Board (NTSB) Chairman harshly criticizes Tesla Self Driving. 
  • Yesterday numerous democrats announce support of a Wealth tax on “unrealized” stock gains; a punishment to founder/CEO’s and deterrent to investment. 
  • Last week National Highway Transportation Safety Administration (NHTSA) hired a vocal critic of Tesla and Elon Musk. She also has blatant conflicts of interest.
  • In September, as part of $3.5 trillion spending bill, the House put forth a proposal to provide a $4,500 credit for EV cars made with “union” labor, blatantly excluding Tesla. 
  • In September, no word of congratulations from White House to SpaceX for completing first ever all civilian crew launched for 3-days in orbit: a milestone for space travel. 
  • In August, Joe Biden did not invite Tesla – the largest EV automaker in the world – to the Electric Vehicle summit at White House. Ford, GM, Chrysler and Unions were invited. 
  • In May, California Congresswoman sends twitter message “F*ck Elon Musk”.
  • Jim Chanos is a famed short seller of Tesla (meaning he profits if Tesla goes down) hosted AT HIS HOME a main event fundraiser for Joe Biden. Chanos is a big donor to Biden and to this day continues to short Tesla. 

Alternatively, we could congratulate and be grateful for: 

  • Building the the most impactful clean energy company in the world: EV’s, Solar and Batteries! 
  • Creating tens of thousands of high paying jobs for working class Americans. 
  • Accruing billions of dollars of wealth to US shareholders, including pensions and 401k’s, thru their ownership of Tesla and indirectly thru S&P 500. If you own a piece of the stock market, you probably own Tesla. 
  • Ensuring the United States stays competitive in the space race. 
  • Building one of the world’s leading technology and artificial intelligence companies right here in the USA.
  • Fighting traffic congestion by boring tunnels. Check out what’s going on in Nevada

The list goes on and a book could be written on each bullet above. But you get the idea. 

Tesla is a global leader in the green energy revolution: manufacturing electric cars, solar panels and batteries. A global technological trailblazer solving the toughest engineering challenges and upending legacy businesses to move us forward to green and clean. And if you listen; truly listen to Elon Musk and management, they are deeply committed to enhancing safety through artificial intelligence and Full Self Driving (FSD). 

Humans text, drink alcohol, fall asleep and some just suck at driving. Tesla is developing a solution to this. Robotic self-driving cars are not a matter of “if”, it’s “when” and it’s within a few years. The masses love it and want it. If the US government impedes it, other countries will surely embrace it. Government can not stop technological progress. 

Enter NHTSA and NTSB

On Tuesday the Chairwoman of NTSB appeared on CNBC to criticize Tesla’s marketing of Full Self Driving. Is it a coincidence that she comes on to speak the day Tesla is reaching all time highs and breaking the $1 trillion ceiling? She is talking about recommendations her agency made 4 years ago that are hardly relevant any more and have largely been addressed. She fails to acknowledge the difference between Full Self Driving suite, offered to all owners, and the FSD beta, offered to a very limited set of owners with a very high safety rating. 

She does not offer any balanced discussion of what Tesla is doing well. And most importantly she fails to discuss or acknowledge the nearly 40,000 deaths per year in combustible engine auto accidents. She has one message: “Tesla bad”. 

Last week NHTSA appointed Missy Cummings as a Senior Advisor. She is an open Tesla critic, has posted offensive tweets about Elon Musk, AND worst, she is on the board of directors of Veoneer, a LIDAR manufacturing company. The latter is significant because Tesla has opted to not use LIDAR technology and instead use camera images and artificial intelligence to interpret real world surroundings. This is a conflict of interest. Here is a Change.org recall petition

It should be noted that some Tesla or Musk followers in the Twitter community were openly hostile and threatening towards Cummings and sent here vulgar threatening messages. This is not ok, appropriate or acceptable in anyway.

No one should be canceled or threatened. We should simply have open dialogue and debate to foster communication, empathy, understanding and move the dialogue forward. 

Wealth Tax

Many democratic members of congress are proposing a Wealth Tax to help fund the latest spending bill being drafted in congress. This is a highly controversial bill that will likely not pass, and may not even be constitutional. This topic is complex and controversial, and requires more consideration than budgeted here. But, I’ll leave you with this. 

Elon Musk almost went broke more than once starting SpaceX and Tesla. Politicians don’t talk about this. Instead billionaires are demonized as the enemy and beacon of economic division. But in the case of Elon Musk, along with other billionaire founders; they are heroes that have brought immeasurable wealth to millions of Americans. Their inventions and innovation have improved the lives of virtually every American: who doesn’t have a smart phone (thank you Steve Jobs) or expect 2 day delivery (thank you Jeff Bezos).  Also, never mentioned is that billionaires will pay billions in taxes when they die or they may donate it to charity beforehand. 

Only two certainties in life: death and taxes. The tax man always cometh; it’s just a matter of time.

EV Summit and $4500 Union Credit

How does one have an EV summit at the white house and claim that Ford, GM and Chrysler will lead the United States into the future of EV manufacturing. Thanks to Tesla the United States already is the global leader in EV manufacturing; and it’s unlikely that any company will ever catch them. 

But guess who else was invited to the event: The United Auto Workers Union president. Coincidence that Ford, GM and Chrysler are all unionized and unions are one of the largest donors to the democratic party? 

And how do you justify in the name of clean energy providing a $4500 tax credit to buyers of a “union made” EV? Why should it matter if a union manufacturers the car or not? 

Manufacturing in Covid

Tesla’s US manufacturing facility is located in the Bay Area of California and when Covid hit hard in March 2020 all non-essential manufacturing was required to shutdown. After about 6 weeks, Elon made a significant push to open the factory; a controversial decision at the time. He wrote “I will be on the line personally helping wherever I can….However, if you feel uncomfortable coming back to work at this time, please do not feel obligated to do so. These are difficult times, so thanks very much for working hard to make Tesla successful!”

Tesla ultimately sued the local health authority and threatened to move to Texas and Nevada. In response California Assemblywoman Lorena Gonzalez tweeted and Elon responded: 

At least we know what Lorena thinks; and hopefully her constituents agree. Tesla recently announced their headquarters move to Austin, TX. 

Short Seller Jim Chanos

Jim Chanos is a famed short seller billionaire who is often featured on CNBC. He is known as a Tesla short and has always referred to Tesla as an overvalued car company. Jim hosted a high profile fund raising event for Joe Biden and is a democratic supporter. 

I actually don’t know if he is actively trying to influence government policy against Tesla, but he does have the connections and the monetary incentive. 

In Conclusion

You may not agree with all of my points above. Maybe FSD is rolling out too quickly. And maybe the factory in Fremont should have been closed longer. And maybe we should incentivize support of unions through tax subsidies. 

But one thing I’m certain of: its entrepreneurs and risk takers like Elon Musk that have built and made the USA the best place to live and prosper in the world. He is responsible for bringing great wealth, innovation and pride to the United States. And it’s not just Elon Musk, it’s all the employees that work hard in his companies and those employees that take the risk of working for other entrepreneurs. Every company starts small and flirts constantly with bankruptcy and disaster. 

We should embrace, encourage and honor our entrepreneurs and the companies they have built, the jobs they provide and the riches accrued to all of us. In the case of Tesla, our politicians should work with, not against Tesla. Yes we should be concerned with safety, but we should embrace risk and innovation as Tesla leads us to a future of clean sustainable energy.  

I am a financial advisor, but comments in here are not Financial Advice. Contact me at: sean@hathawayfinancial.com

Netflix reaches all time high $618 with runway ahead

Gaming looks promising

Foreign operations scale and leverage working

Sports…kind of

And other catalysts…

Gaming

In this quarter alone Netflix has (1) Hired a VP of Gaming, (2) Acquired a gaming studio and (3) launched mobile gaming in foreign countries. 

We’re all still trying to wrap our heads around what gaming means to Netflix business, revenue, stock price, etc…but the moves they are making signal they are serious, focused and moving fast — typical Netflix MO. Just yesterday, Netflix announced the acquisition of Night School Studio, an independent video game developer best known for its critically acclaimed debut Oxenfree. 

On Tuesday this week, Netflix launched five (5) games to users in Italy, Spain and Poland (two games were launched in Poland a month back). 

You can see on the menu below left that “Play Mobile Games” appears as a row on your mobile device screen. 

By all accounts global gaming is BIG. This VentureBeat piece expects the gaming market to surpass over $200 billion in the next couple of years and estimates that 90% of gaming occurs on a mobile device. Co-CEO Reed Hastings has notably commented in past earnings calls that Netflix competes against Fortnite (and sleep) more than Disney. Point is, gaming is big, not going away and is synergistic for Netflix.

Possibly Netflix’s most significant competitive advantage is their ability to focus and execute fast; it will be very exciting to see what they can do in this space over the next couple of years. I expect A LOT. 

Foreign Scale and leverage (ex. Squid Game)

Squid Game, a Korean based dystopian bloody thriller involving participants in a life or death game, recently launched September 17, and according to FlixPatrol is the #1 title in 78 countries (as of this writing its estimated by some accounts to be #1 in 90 countries with 95% of viewing occurring outside Korea). According to co-CEO Ted Sarandos earlier this week “Squid Game will definitely be our biggest non-English language show in the world, for sure” and added that “there’s a very good chance it’s going to be our biggest show ever.” 

Money Heist, a Spanish original series about a criminal mastermind and his thieves pulling off the biggest Heist in history, is the second most watched series behind Bridgerton and is the MOST watched foreign language show. 

At the end of last quarter Netflix had 209 million global subscribers: 135 million or ~65% are outside of the US and Canada. Netflix is investing heavily in foreign studio and production space in the UK, Europe, Latin America, Asia and specifically Korea, where earlier this year Netflix announced the acquisition of production/sound stages.  

I am not a high-brow foreign film aficionado, but a few of my favorite Netflix shows have been foreign productions:

  • Ragnorak: Thor origin story from Norway.
  • Better Than Us: Future AI robot story from Russia. 
  • Lupan: sophisticated thievery in France. 
  • Luis Miguel the eponymous series from Mexico (my wife’s obsession).

The punch line here is the majority of Netflix’s future growth will be in foreign countries and they are many years ahead of legacy media in terms of building and leveraging that platform and infrastructure. Squid Game, a relatively low-budget production, has or will capture the attention of more than 82 million Netflix accounts (that is the number of accounts that have watched Bridgerton); a return on investment (easy measurement is $ cost of production per hour watched) enabled by their scale that no other entertainment company can currently achieve. 

Sports…kind of

Formula 1

Netflix’s inside and behind the scenes look of Formula 1 racing “Drive to Survive” is entering its 4th season and the CEO of McLaren Racing told reporters that the Netflix show was “the single most important impact for Formula 1 in North America.” And the average F1 TV audience in the United States has risen from 547,000 in 2018 to 928,000 in 2021, according to the New York Times

I’ve always believed Netflix needs to move into sports, but understand the challenge of monetizing that venue given their non-advertising model. F1 may be different because it is (a) a sport with no time-outs (b) a sport they could leverage their tech expertise on (imagine being able to switch between different drivers or pit-crew cameras on demand) and of course (c) they’ve already amassed a large F1 global audience. 

Now, finally, Reed Hastings during interviews last week in Germany revealed “A few years ago, the rights to Formula 1 were sold. At that time we were not among the bidders, today we would think about it.”  

Golf

Netflix will carry forward the uber-successful “Drive to Survive” model to the game of golf according to reports by GOLF.com. This means Netflix would follow a number of yet to be disclosed PGA Tour players behind the scenes in their personal life, practice and tour rounds. 

Approximately, 25 million people regularly golf in the US and 60 million globally. Not huge numbers, but consider only a few 1000 probably race cars in the US regularly and juxtapose that with the viewership Netflix has driven. 

Point being these are interesting around-about ways for Netflix to enter sports without being beholden to a “live” advertising driven model. Netflix story-tells the drama behind the live action; and we humans love drama! 

Other catalysts – 

Kids: So I mentioned the Squid Game to my kids on Monday of this week because I saw/read that it had reached #1 on Netflix. My youngest of 12 years told me she had already binge watched 3 episodes and learned of it on TikTok! My parenting can certainly be called out here, but two major points (1) kids are addicted to Netflix and won’t be leaving and (2) social media and in particular TikTok is driving viewership to Netflix. 

Disney admits to headwinds: Bob Chapek revealed at a recent investor conference that Disney+ growth will be in “the low single-digit millions” this quarter. The street was not happy with this. It’s somewhat of a reality check that it’s hard to grow internationally. It just gives a little more credibility to what Netflix has achieved. 

Acquisitions. Netflix is showing more appetite for acquisitions, acquiring IP Roald Dahl Story Company, which including stories like Charlie and the Chocolate Factory, James and the Giant Peach and the BFG. 

Tudum: Netflix revealed that their sizzle real fan event Tudum, attracted a massive number of global views and social media exposure.    

Seinfeld. Netflix begins streaming on October 1 all 180 episodes of Sienfeld, the show about nothing. Enough said. 

Emmy’s. Netflix won 44 Emmys this year, tying a record set by CBS in 1974. Not that big of deal for viewers, but helps attract Talent to work with Netflix and is a proxy for quality of content. 

Conclusion

Exciting times for Netflix, no doubt. Hopefully they hit their numbers this quarter and give a decent guide to Q4 or we will see a short term hit to stock price. If they continue to execute on the streaming side and are successful in gaming; then this is a very good long-term investment. 

BTW, Reed and Ted combine for about 45 years of C-level management at Netflix. Let that soak in. I would NEVER bet against this management team! 

Disclosure: This is not stock buying advice and I’m not recommending you buy NFLX as each person’s situation is different.

Ping me with questions at sean@hathawayfinancial.com

A primer on Tesla and why they have a shot at becoming The Most Valuable Company in the World.

  • Tesla has a realistic shot at becoming the most valuable company in the world within the next 10 years.
  • It’s still a relatively misunderstood (car only!) company that spends $0 on advertising.
  • Tesla’s market opportunities outside of automobile may be in the trillions of dollars: 
    • Energy generation and storage.
    • Commercial transportation in Tesla Semi.
    • Autonomous driving and robo-taxis.
    • Insurance, HVAC and other.
  • The competition argument is over-hyped.

Enter Plaid

Tesla recently released the Model S Plaid, which is a 4-door family sedan that goes 0-60 in less than 2 seconds, making it the fastest production car in the world. It’s also one of the safest cars in the world and without a doubt the technologically most advanced car. Here’s a video of it effortlessly cruising by a Porsche and two McLarens at Laguna Seca Raceway. 

“Between bouts of awe and car sickness—Sharp Curves Next 22 Miles—the Plaid sometimes had a melancholic effect on me. Man, nothing will ever feel fast again. Every piston-powered brag must now come with an asterisk; every Cars and Coffee, a sacrament of denial.” – Dan Niel test driver and writer for the WallStreetJournal.

At a price tag of close to $150,000, the Plaid is not going to be a top seller, like the Model Y, which Elon Musk expects to be the top selling car in the world within the next couple of years. The Plaid, however, is a symbol and metaphor of Tesla’s technological prowess and engineering dominance; their ability to imagine the future and deliver.

Leadership, Vision, Philosophy

The company is led by a person who is credibly going to be responsible for putting humans on Mars in our lifetimes. Elon Musk’s leadership and vision is unique in that it’s simultaneously wild and proven to be credible. Elon is certainly in the company of Steve Jobs, Walt Disney and Jeff Bezos for building extraordinary companies propelled by inspirational vision. I’ll add Ford in there as well; particularly considering they are the only significant American car company, along with Tesla, to never declare bankruptcy. These companies have and should endure long after their founders. 

Musk’s vision is establishing life on Mars and he believes it is absolutely essential to preserving human existence. But not only does he believe this, he takes massive measurable action.

In terms of “Vision” Tesla is too narrowly defined as a car company. In their own 10-K (annual report filed with the SEC) they state “We design, develop, manufacture, sell and lease high-performance fully electric vehicles and energy generation and storage systems, and offer services related to our sustainable energy products.” They further state “Our mission to accelerate the world’s transition to sustainable energy, engineering expertise, vertically integrated business model and focus on user experience differentiate us from other companies.”  

This “mission” statement is not window dressing; it is reiterated and perpetually echoed in earnings calls and conversations with Elon. He is intently focused on user experience and environmental sustainability. 

Energy Ecosystem  

There exists undoubtedly a global desire to decrease pollution and carbon footprint from use of fossil fuels and this trend is only accelerating. Even China, often derided for egregiously polluting the environment, has demonstrated of late a position of leadership in driving sustainable and clean energy practices. (No doubt driven in part by their desire to participate in a lucrative likely trillion $ sustainable energy market opportunity).

Tesla has positioned itself since long ago as a company that will participate in the full clean energy ecosystem, from generation through solar, to storage with battery, to use thru transportation and residential and business needs.

So every product that Tesla builds, whether car, solar panel or battery pack, is designed with this holistic philosophy in mind. 

Markets and analysts are catching on to this, but it’s important to realize that Tesla is much more than a “car” company. 

Elon has commented he believes Energy and Storage segment of Tesla will continue to grow faster than automobile for years into the future and could be as large. This segment was about $600m revenue in the quarter ended March 31, 2021 compared to about $300m a year ago; so it doubled. That’s already a 12-month run-rate of over $2 billion. 

Solar generation and energy storage is a trillion $’s market and growing.  

Battery Technology

Battery is the primary cost component and primary driver of vehicle power and mileage range. Battery is therefore arguably the single most important component of the car simply because cost and vehicle range are the primary concerns of consumers.

Energy storage is a tough nut to crack. One of the biggest issues globally with electric power grids is the need to match electricity demand with production. Energy storage fixes that problem. Our current electrical grids don’t “store” energy, it just runs around inefficiently either being used or dissipating. Tesla appears to be at the forefront of solving this problem and building the capacity to address it. 

Debate over who has the “best” battery technology seems ongoing, but consider the following: 

  • Tesla’s current battery manufacturing capacity is already more than all other car manufacturers combined and growing. In fact, Electrek noted that Tesla’s first full battery cell factory in Berlin will ramp up to produce roughly the world’s current capacity. What!?!?
  • Tesla has been designing batteries for use in transportation at scale for over a decade now. 
  • Tesla actually has a “Battery Day”; akin to an investor day. I’d never heard of a Battery Day until Tesla did it. Elon talked about – surprise surprise – emphasizing first principles physics and engineering in their design.

Yes, GM, Ford, Volkswagen and others are announcing plans to ramp up battery capacity; but the point is Tesla already has and is ramping further. They are literally years ahead in the technology race and know-how. It’s simply hard to imagine – not impossible – but hard to envision how these competitors will compete at scale with a company that has been at scale for so long and was built to be an electric car company from the ground up. 

Consider this: Ford announces a joint venture to produce 60 GWh annually and expects to need 240 GWh globally in 2030. In November 2020 Elon made comments about battery capacity in Berlin alone: “It will be capable of over 100 GWh per year and possibly over time, it will be going over 200 to 250 GWh.” In summary, Tesla is saying it’s Berlin factory alone (i.e. not considering Giga Nevada, Texas or Shanghai) is likely in a few years going to produce more than Ford expects to need in 2030. Let that sink in! 

Manufacturing and Supply Chain

Elon talks a lot about how manufacturing is complicated, under-rated and will be their key competitive advantage in the future. As he likes to say they build the machines that build the machines that build the parts. 

It is important to note, as Elon has alluded to on investor calls, that most electric vehicle startups (Nikola comes to mind) are simply designing an original looking car “body” and then buying parts and assembling them. Tesla starts with what is the ideal end state; then asks “ok, how do we build that?”.  And to most the answer is completely impractical, inefficient and cost-ineffective.

Logically speaking, why are virtually all cars today assembled from 1000’s of metal parts? Theoretically, with the exception of parts that move (wheels, shocks, steering, seats, etc…)  the car should be one piece of metal. It would be safer (stronger) and easier to assemble. That’s where Tesla is moving. The picture below says 1000 words (or 70 words). The analogy management deploys is that of a match box car: just one piece of die-cast metal would be ideal.

Tesla has demonstrated the ability to move at lightning speed in their build and deployment of Gigafactory Shanghai built and producing Model 3’s in 10 months. They are building factories from the ground up that are first and foremost designed to build parts for electric cars and assemble electric cars. Most – if not all – other car manufacturers are retrofitting pre-existing lines that are simply not optimized for EV manufacturing. 

In 2020 Tesla broke ground on Giga Berlin and Giga Texas; and both seem to be moving at light-speed and should be manufacturing by late 2021.  

Software, AI and FSD (Full Self Driving)

Tesla is a technology company that builds cars; like Apple building computers. Nobody marries hardware and software so beautifully as Tesla and Apple.

Software 

I’m just going to lift some script from one of the best recent articles on software in the car from Christopher Mims of the WallStreetJournal.

“Today’s most complicated automobiles have up to 200 computers in them, just smart enough to do their jobs controlling everything from the engine and automatic braking system to the air conditioner and in-dash entertainment, says Johannes Deichmann, a partner at McKinsey whose expertise is software and electronics in automobiles. These computers, made by an assortment of suppliers, tend to run proprietary software, making them largely inaccessible even to the auto maker”.

“Since the first Model S, Tesla pioneered replacing hundreds of small computers with a handful of bigger, more powerful ones, says Jan Becker, chief executive of Apex.ai, a Palo Alto-based automotive-software startup. Systems that used to require dedicated microchips now run in separate software modules instead.This is why Tesla can add new capabilities to its vehicles through over-the-air updates, he adds.”

The above concepts are paramount because unlike other auto manufacturers, Tesla does not have 200 separate computers or microchips running proprietary software: They have ONE software. Tesla Software. They control the entire system from car performance to user experience. They take complete ownership of the car’s electronics. 

It is also for this reason that Tesla is arguably the least affected auto-manufacturer from the semiconductor chip shortage. They have a hand in the design of all the chips used in the car and they procure those chips directly from key suppliers. And finally, it is why they can simply push software and firmware updates seamlessly through the air to your car to fix bugs and improve performance. 

This will resonate for gamers. Elon said during the Plaid unveil: “There’s never been a car that has state of the art computing technology, state of the art infotainment where this is literally at the level of a PlayStation 5…This is actual PlayStation 5-level performance… yes it can run Cyberpunk. It’s high frame rate, it will do 60fps with state of the art games.”

Artificial Intelligence 

On a recent earnings call Elon stated that he believes Tesla may have the most advanced AI team on the planet. It is indisputable that they have the most data and growing with millions of cars providing real-time data and feeding their neural network AI machine.  

Andrej Karpathy, Sr. Director of AI at Tesla recently gave a presentation about what they are working on; it’s about 30 minutes but well worth it. Below is a picture of Tesla’s inhouse supercomputer, which Karpathy said “might be the 5th most powerful supercomputer in the world”. 

I’d like to see GM or Ford’s supercomputer. 

Tesla has ditched radar and lidar in favor of relying on high definition cameras to enable FSD. Many are skeptical about this approach and Elon responded: 

It will prove very difficult for “car” companies to become technology companies. Traditional car manufacturers tout that they are hiring 1000’s of software engineers, but they will and are having trouble attracting top talent for a few reasons. (1) Top talent always wants to work with other top talent on the cutting edge and Tesla owns that space by a long-shot. (2) Traditional Tech companies – particularly in Silicon Valley – pay relatively high salaries that traditional car manufacturers will find difficult to match. (3) Software development requires a certain DNA built into company culture; hard for traditional auto to change DNA. 

FSD with AI will be solved. Not IF, but WHEN. It is a complete game changer and it’s very difficult to envision any other “car” company catching Tesla soon. Maybe a company like Alphabet’s Waymo will develop and license to traditional auto. FWIW, Elon has stated that he’s not opposed to licensing their AI either. 

Ride-Hail and Robo-taxis

Ride Hail

Assuming Tesla is sincere in their intention to introduce robo-taxis in the future, then the introduction of ride-hailing (i.e. Uber/Lyft like service) is a natural first progression to autonomous taxis that could be launched now. They would need to build an app for users and an interface for the driver in the car (think today an Uber driver uses their phone, but the driver’s-side tech would simply be part of the car’s interface). They would need to build algorithms to match drivers, riders and routes. Given the technology they already have in place this is not an overly difficult endeavor. 

Finally and most importantly; launching “Tesla Ride-Hail” would likely create tremendous incremental value: 

  • Existing Tesla Uber/Lyft drivers would immediately start using Tesla’s Ride-Hail. 
  • Potential future drivers on-edge of purchase would lean Tesla. 
  • Riders would be interested in using the service simply for the experience of riding in a Tesla. 
  • The aforementioned factors would drive incremental revenue from sales of cars (thru organic marketing as well) and of course from the service itself. 

Robo Taxi

This is dependent on operationally effective FSD, but it has the potential to be an orders of magnitude material incremental revenue driver. The market or TAM is difficult to measure because it doesn’t exist yet, but without the human cost element of driving, a robo-taxi service would be much cheaper the Uber/Lyft offerings and would likely see mass adoption: Adoption from users and adoption from car owners as a means of incremental income (i.e. you would buy Tesla and lend it out to FSD when not in use).

This sounds too futuristic for many people to wrap their heads around; but it’s arrival is inevitable. The “when” and “who” are debatable. 

Addressing the “who” no company is gathering the troves of data Tesla is. They literally have millions of cars on the road gathering data. Waymo is a division of Alphabet and they’re clearly working on this endeavor as well, but it’s hard to imagine how they can catch up to Tesla.

Tesla is the market leader here and the first to market will realize significant network advantages as more and more users adopt and their AI and neural network gets smarter and safer.

Commercial (Business) Applications

Tesla Semi 

This is one of the biggest markets ripe for disruption and least talked about. When we talk about cars, myriad consumer tastes and preferences enter the equation. Commercial trucking? Cost per mile. If Tesla can deliver on their promises to deliver a solution that significantly reduces cost per mile transportation of commercial goods; Tesla will have another multi-billion dollar product line.

AND if they can do this with self-driving it will be near impossible for copy-cat EV Semi producers to match their cost per mile. Game changer.  

Solar, Megapack and Powerpack 

Elon has mentioned in the past and brought up the idea/concept again during Tesla’s Q1 2021 earnings call that the energy needs of the entire United States could be satisfied with a 100×100 mile solar panel array. 

Simply put, the point here is Solar Panel could be the sustainable energy panacea we’re looking for. It won’t be a 100×100 mile grid, but it will take the form of residential and commercial use, as well as commercial power production. One could argue Tesla has a lot of competition in this space and that is true, but they are also right in the middle of it and building it into their eco-system. 

The Megapack and Powerpack are simply Tesla’s solution to energy storage at commercial scale. 

Insurance

Given Tesla’s technical prowess and troves of information on each car, geography and user driving behavior they will be able to price insurance more effectively than any insurer. Information really is power here. Tesla will offer lower rates and still be able to extract attractive profits. 

Further insurance will/is simply sold with the car; will just be another box you check on your way to checking out. It’s estimated that US auto insurance is a $50 billion market.

HVAC

Tesla has discussed on earnings calls that they made material technological advances to the automobile HVAC system when developing the Model 3; specifically they referenced being one of the only electric cars to utilize heat-pump technology. Heat pump technology, as opposed to pure AC or Heating, is significantly more efficient. So, this is a logical place for Tesla to invest R&D because air conditioning and heating are electrical power drains. 

They also frequently high-light their advanced HEPA filtration systems (Covid provided a natural pathway to that conversation). Elon recently tweeted (June 15, 2021) that he believes the Tesla air purification system is literally 10X better than any other car. In the same series of tweets he specifically mentioned (a) firmware updates to the Tesla cars HVAC and (b) the concept they could/would scale up HVAC for home use. 

Home HVAC is a logical and conceivable next step for Tesla. It makes sense because home HVAC suppliers don’t inherently seem like they’re innovating at a rate or urgency Tesla needs to. I’m pretty sure they aren’t providing “firmware” updates to home HVAC systems. So imagine, along with the solar panels and power pack, now Tesla offers an integrated HVAC; i.e. Tesla cooling, heating and air filtration systems for the home. The brand Halo alone would drive sales.

Charging Networks

Charging Networks

Tesla’s has over 25,000 Supercharger stations throughout the world and is aggressively expanding. Superchargers allow you to recharge up to 200 miles in 15 minutes. The reality is this is going to be more than enough for most people. Further, Tesla is rumored to be adding restaurants and entertainment to the supercharger experience. With range anxiety being a significant impediment for many to transition to EV this is obviously a huge first mover advantage for Tesla. On a related note Tesla recently announced its longest EV charging route in China of 5000 kilometers.

Have you heard of Ford, Chevrolet or Toyota supercharger stations? Ever seen one? 

This is an area that simply feels intuitively advantageous.

Competition

A big drag on Tesla stock are bears or naysayers prognosticating storms of competition crowding the EV space.

Innovator’s Dilemma 

Tesla was founded in 2003 and has largely been thought of as a niche EV manufacturer until the market and as a result the incumbents (Ford, GM, Toyota, Volkswagen, Etc.) took notice when Tesla’s stock price increased more than 10x from late 2019 into 2020; eventually assuming a market value worth more than all traditional car manufacturers combined. Using the terms of the Innovator’s Dilemma (a great book by Harvard professor Clayton Christensen), Tesla is accelerating up the S-curve so quickly now that it will be difficult for others to catch them. 

Incumbent auto manufacturers not only must overcome technological innovation issues, but to do so, among other things, must realign their corporate culture and strategy. Changing corporate culture is turning the Titanic (not even a strong enough analogy); they have employees, processes, physical infrastructure and culture that have been entrenched for decades. It’s not an impossible task, but of monumental difficulty.

Dealerships

The traditional “dealership” model is a financial drag on traditional auto-makers. From a simple profitability standpoint we can think of this as simply a transfer of profit margin to a middle-man. 

From a consumer perspective; it’s fair to say the experience of buying a car for most is terrible: the haggling, the negotiating, the upsells, the financing.

The Tesla purchasing experience is straight-forward. Order the car on line, and it is delivered to your house or a place near. Everything is straight-forward, transparent and practical. You can customize it. You can buy it or finance it. 

The Dealership model is essentially a racket that traditional auto manufacturers will live with for years. 

Apple

As mentioned earlier, Apple is the only other company –  in my opinion – that has been so successful combining hardware and software in a consumer application. Apple may be the only company with DNA to compete with Tesla. Not only does Apple have hardware, software and aesthetic design expertise, but they are masters of managing supply chain. One could argue the future of cars is just a big phone on wheels with a seat. They also have the capital to make a push. It’s interesting to talk about Apple, but they simply can’t be a threat for at least 5+ years.  

Netflix

No, Netflix won’t push into the automotive space (save from a content on screen standpoint). But some have analogized Tesla to Netflix and GM/Ford to legacy media, like NBC/Peacock or Disney, noting that Disney has seen early success. This is far from a perfect analogy. First I’d say the jury is still out on Disney’s streaming success, but they’ll likely be a long-term survivor. The analogy however is flawed. In entertainment, I’m sure you’ve heard “content is king”. Well Disney has the content. They need to catch Netflix on the tech side, but unfortunately for Netflix their technology is not a meaningful long-term differentiator (I’m sure some would debate me on this). On the other hand, for cars, I believe tech is the future and legacy auto-makers have never done tech well. A better analogy might involve digital still pictures to developing film.  

Conclusion

Tesla is here for the very long term and will see double digit revenue growth for years to come. Nobody can stop this flywheel Elon created.  

Great 2020 Netflix! Over 200 million subscribers

9 of the top 10 Global Shows in 2020 

Stock price at all time high of $590 

The Haters have been burned

Now to $700 and beyond

Netflix delivered big in 2020 and Q4 was the cherry on top. Besides beating their 4th quarter paid subscriber forecast by 2.5 million (a 42% beat), they confirmed break-even cash flow expected in 2021 and positive cash flows going forward. 

About a year ago when the stock was trading around $350, I wrote what it would take for Netflix to achieve $500 price and move to $700 and beyond. Delivering >30 million subscribers in 2020 and positive cash flows were top on that list. 

Full disclosure: I hold Netflix shares and have encouraged my friends and clients to do the same. 

So Netflix stock is now trading around $590 – an all-time high – with a market capitalization of $260 billion (Disney is about $315b). I believe undoubtedly that Netflix will continue to grow and move higher over time. Netflix will grow to a $500 billion market cap and its stock price will increase to over $1000; the only question is will this happen in 2-3 years or 5+ years. 

First, a little fun look back…

Netflix Haters

My favorite long time hater of Netflix is Michael Pachter of Wedbush Securities; screaming “sell” since 2012. Worried his consistently erroneous predictions damaged the reputation of the firm, his own co-workers asked him to stop covering Netflix.

And then about 1 year ago, Laura Martin of Needham and Co., a graduate of Stanford and Harvard, said Netflix would lose millions of US subscribers in 2020 from the entrance of competing lower priced services.

And of course David Einhorn, renowned manager of multi-billion dollar hedge fund Greenlight Capital said the Netflix narrative was “busted”; too much competition and too much debt.  

There have been many other haters of Netflix over the years. How can so many people be so wrong? 

The thesis from an analytical and technical standpoint was that Netflix could not withstand sustained competition (i.e. streaming wars) and Netflix was burning too much cash and assuming too much debt. Netflix disproved both those theses in 2020.  

Always in play in finance and the world is the psychological bend of certain folks wired to hate. We all know some, rooting against the success of others. Some are short sellers and don’t-pass-line craps players. If you see one, consider exploiting their blind cynicism and negativity for profit. 

Now to $700 and beyond 

Again, Netflix is going to $700 and then to $1000; the real question is how long will it take? This is important from an investment perspective as you weigh opportunity cost. 

Content: At risk of stating obvious, Netflix needs to continue pushing quantity and quality…GLOBALLY. The media here in the US is so focused on the US competition; we hear very little about how the streaming wars are shaking up globally. But Netflix’s real growth opportunity is international APAC and EMEA; and this is where they are extending their lead. As a great example, Netflix recently announced they are leasing studio space in South Korea where they have invested over $700 million on content over the last few years. 

Subscriber Growth: Again, at risk of stating obvious, Netflix needs to continue to grow subscribers at a steady clip of at least 30 million per year. I hope Netflix presses absolute subscriber growth over average revenue per subscriber (ARPU); the argument being it is more vital to build the global Netflix eco-system, maximize Netflix in global cultural conversations, and then figure out how to extract as much revenue as possible.

Setting audacious goals and targets would be helpful. Netflix is modest compared to how Elon thinks. A goal of 40-50 million subscribers per year would be more appropriate; and stop talking about demand pull-forward already.

China: With a population of 1.4 billion people, Netflix has to continue to knock on their door.  Apple and Tesla have had tremendous success in China and so will Netflix. It’s rumored that Bob Iger is on Biden’s short list for US Ambassador to China. Bob might have a plan to get Disney+ and streaming overall into China. An announcement into China would translate to an immediate 20%+ bump in valuation.   

Sports: I’ve been banging this drum for awhile, but sports creates a new growth opportunity for Netflix and hopefully they will dip their toes in the water. I appreciate Reed’s relentless focus; and it has paid off. But he and the management team are highly capable, and expanding into live sports makes sense now, particularly from the tech side of the house. 

Netflix is better at tech than any entertainment company; way better. Netflix has the potential to change the way we watch sports; creating material incremental value viewers will pay for. Disney is moving there now. Imagine what Netflix could do: 

  • Switch camera vantage points and zooming in/out at viewer discretion. 
  • Rotating audio feeds among different announcers, coaches and players.
  • Grabbing/recording specific plays and sending to your friends. 

One’s imagination could run wild here. Consumer Control, a Netflix motto and conspicuously absent from sports. 

There are hurdles: sports are expensive and seemingly require advertising to be profitable; the latter not congruent with Netflix’s philosophy and biz model. But, Sports is an area ripe for disruption and who better than Netflix to give it a go. 

Conclusion

For now let’s just celebrate Netflix’s great execution. Oh and they were kind enough to calculate for us their annual return since IPO: 40%. Reed even made a comment on the call in reference to that number, “if that’s underachieving then we’ll do more of that!”.  

Pretty damn good.

Disney+ Restructured and it’s NOT Going to Work

We all know what Disney should do: ALL Content to ONE streaming service. 

They continue to confuse customers with Disney+, Hulu, ESPN+ and soon to launch Star International, and continuing with cable/TV channels, movies in theaters, etc…

Decisions around where to distribute content and how to market will inevitably create internal conflicts.

Disney just announced a massive restructuring plan designed to accelerate their direct-to-consumer strategy, i.e. Disney+. It’s the right direction, but it’s too slow…

As a reminder Covid 19 nuked disney’s traditional businesses: 

  • Theme parks: shut down and laying off 28,000 employees. 
  • Big movies pushed to 2021, because movie theaters closed indefinitely. 
  • Disney Cruises: Corona Cruise anyone?
  • ESPN: Sporting events shuttered/delayed; but coming back. Still, layoffs expected. Also, ESPN social wokeness does not seem to be helping viewership. 

Have no fear Disney will return in full force. For reference see Hiroshima before/after below. 

Lockdowns and sheltering in place propelled Disney+ subscriptions to over 60 million as of August. Downside is average revenue per subscriber is less than $5.00. For Netflix that number is over $13.00 in the US and Canada. Netflix is about a ¼ the size of Disney in terms of total revenue.

Disney Strategy and Leadership

Bob Iger resigned as CEO right before Covid hit hard, but maintains the title Executive Chairman and he “will continue to direct the company’s creative endeavors”…whatever that means. 

In his place as CEO is Bob Chapek, who previously led Disney Parks (some find it odd that a CEO was chosen that didn’t have extensive content and media experience) 

So then, this week Chapek announces a management restructuring. Basically, Disney’s three content groups will focus on content creation and a new group will focus on content distribution. 

  • Studios: Disney, Pixar, Marvel, Lucas Film, 20th Century Fox
  • General: TV channels like ABC, FX, National Geographic, Disney
  • Sports: ESPN and ABC sports

The heads or Chairmans of these three divisions will report directly to CEO Chapek. And there is a new division: 

  • The Media and Entertainment Distribution group, led by Kareem Daniel, a 46 year old executive who previously ran Consumer Products, Games and Publishing “will be responsible for the P&L management and all distribution, operations, sales, advertising, data and technology functions worldwide for all of the Company’s content engines, and it will also manage operations of the Company’s streaming services and domestic television networks”.

Red Flags: 

  • Bob Iger resigns abruptly. 
  • Bob Chapek appointed CEO; lacking content and media experience. 
  • Disney still talking about Disney+, Hulu, ESPN+ and now launching Star International. 
  • Kareem Daniel new Media and Entertainment Distribution group, and he lacks content and media experience. 
  • Conflicts of interest among Content Heads and Kareem Daniel. 
    • Think about it. If any of the content in the three content divisions does not perform well the Content Heads will immediately blame the inexperienced Kareem Daniel for his failed distribution and marketing strategies. 

In 12 Months: 

  • Disney will slowly be moving more to streaming platform. Maybe some tent-pole blockbusters. 
  • A number of analysts believe they will spin-off ESPN; I wouldn’t bet on that. 
  • One or more of these chairmen/heads will be gone in the next 12 months…too many conflicts. 

Other fun facts: 

Netflix market cap surpassed Disney again last week: $250 billion vs $230 billion.

College Football Could Decide the Presidency

It’s insane how important and relevant college football is and how it will influence the presidential election. Here is a recent ad by Biden, basically blaming Trump for the shutdown of college football, and of course conversely, this week Trump spoke directly with the commissioner of the Big10 in an effort to try to get them to play football. Politics!?

There are 5 so called “power conferences” in football: SEC, ACC, Big12, Big10 and Pac12. These conferences include the biggest schools in the US and make up the majority of college football viewing.  

So get this: the SEC, ACC and Big12 are hell-bent on playing football this fall. The Big 10 and Pac12 cancelled their seasons due to Covid – but those decisions may very well be reversed…more on that later.  

Think of the Pac12 as west coast schools and the Big10 as mid-west or upper middle US. Below is a great map/graphic to help visualize where these schools are.  

The SEC, ACC and Big12 include schools and regions that live and breathe football. Think Alabama, Texas, Florida, Oklahoma, etc… Football is a lifestyle, a religion, a way of life and it shows in National championships. 

National Football Champions for the last 15 years: LSU, Clemson, Alabama, Clemson, Alabama, Ohio State, Florida State, Alabama, Alabama, Auburn, Alabama, Florida, LSU, Florida, Texas.  

No Pac12 schools on that list and Ohio State from the Big10 is on the list once. 

How important is football? Well according to this thoughtful write-up the top 25 football programs combine to earn an annual profit of $1.5 Billion dollars on $2.7 Billion of revenue. Texas A&M is #1 bringing in almost $150 million in revenue and $100 million in profit. It’s widely understood that these football programs help fund all other sports. And don’t be mistaken; college football is a business and it’s very much about money and prestige.  

So now there is a lot of hoopla about the Big10 not playing. Apparently a vote was held a few weeks back among the presidents and chancellors of those schools and it was 11 to 3 against playing (there are 14 schools in Big10). Three schools voted to play: Nebraska, Ohio State and Iowa. 

The decision to not play has been embroiled in controversy. In fact, the Big10 just this week made public the results of the votes after significant public pressure, including lawsuits. Public institutions not being transparent around how they decided to cancel football is entirely inappropriate.  

BTW, nobody seems to care that the Pac12 is not playing. It’s three-fold: (1) The Pac12 is rarely in contention for a national championship, (2) the west coast does not bleed football like Texas and (3) the west coast is led by democrats that have locked down the states. Governor Gavin Newsom still has some of the most draconian authoritarian measures in place, so it’s hard to even imagine 4 of the Pac12 schools (USC, UCLA, Stanford, Cal) playing at all. 

My personal belief is these schools should be playing football. I think the athletes would be safer and healthier hanging out with each other, practicing, working out and getting tested regularly. They could even have them all live together. If these student-athletes are not playing football, they will be out socializing and partying regardless. 

Politics

No need to talk about the Pac12 much, because three of the states there: Washington, Oregon, California are blue democratic strongholds, housing 8 of the Pac12 schools. And nobody is really complaining about not playing. The Pac12 was arguably irrelevant, and they are boldly solidifying that position.

But the Big10 is VERY interesting for a few reasons: 

  • Football is a bigger deal there. Everyone can name friends/acquaintances or famous people that went to either Michigan or Ohio state. Both those stadiums hold over 100,000 fans.  
  • There is a lot of drama and controversy swirling. Fans are irate that they’re not playing. Nebraska football players and parents are suing the Big10 and have demanded all documents around decision making be made public.  
  • Swing States. Battle Ground States. That’s right, there are a lot of them in the Big10. These are states where the presidency is decided.  

So let’s talk about the Big10 Battleground states: Michigan, Wisconsin, Minnesota and Pennsylvania.  4 states representing 56 electoral votes (Trump won 288 votes to Clinton’s 215).  Trump won Michigan, Wisconsin and Pennsylvania, but Obama won those states in 2012. Trump won Michigan by a margin of just 0.23%, Wisconsin just 0.77%, and Pennsylvania by 0.71%. Clinton took Minnesota by 1.5%. 

So in terms of Big Football programs in these states think: 

  • Michigan – Wolverines. 46,000 students
  • Michigan State – Spartans. 50,000 students
  • Wisconsin – Badgers. 44,000 students
  • Penn State – Nittany Lions. 47,000 students
  • Minnesota – Golden Gophers. 51,000 students

These are BIG Schools, with BIG followings in BIG swing states. Trump won Michigan by just 10,000 votes. That’s like 1/10th of Michigan fans in the stadium! 

So if Michigan is not playing and the fans are pissed, the presidential election could come down to “who is to blame”. Do you think it’s Trump’s fault because he mismanaged Covid? That argument could work, but it is materially weakened if SEC, ACC and Big12 start playing football. 

Or do you blame the democratic leadership? Gretchen Whitmer is another lock-down heavy democratic governor who said “I was glad that the Big Ten took the leadership role that they did”. So maybe people blame her as a democrat and therefore Biden. 

One thing is for sure Trump wants them to play and he wants credit for them playing. I don’t think it’s playing well for the democrats at this point. The Big10 is now revisiting their decision and are talking about a revote.

In the meantime a lot of college football games will kick off this weekend and next. Imagine how the players in the Big10 and Pac12 are going to feel watching. Ouch. 

More fun to come in the near weeks ahead. 

Below are the electoral results (source: Wikipedia). 

US Stock Market soared to Record Highs This Week

Stock Market up 5% for the year

Stock Market up 52% from the low this year

An investment made on the first of every month since March 1, would be up 15%

I hope you haven’t been sitting on the sidelines this year! 

Many don’t/won’t realize, but almost exactly 6 months ago US Stocks reached a record high and now almost to the day 6 months later they are reaching new all time highs! All this in the wake of the fastest drop in history: down 34% in 32 days. And fastest recovery: back up 52% 5 months later.

The previous S&P 500 record of 3386 was reached on February 19, 2020, before it started its precipitous fall down 34% on March 23. This week on Tuesday August 18, 2020 (so 6 months to the day) the US Stock Market has again reached an all time high of 3390.

In fact stocks are now up almost 5% this year. That buy itself is a return ANY investor would welcome. 

ALL THIS DURING:

  • Covid 19 pandemic shutdowns
  • Depression era unemployment rates
  • Nationwide protests, and
  • (and if you live in California) Record forest fires and rolling blackouts. 

Who woulda thought? 

Moral of the story: 

Don’t try to time the market. You can’t. Nobody can. 

Just buy it and stick with it. So if you could have timed the market bottom and invested on March 23, your investment would be up 52%. But this is dumb, because nobody can. 

So instead, let’s say you simply just kept on investing at a constant rate (also known as dollar cost averaging). Six equal investments made on March 1, April 1, May 1, June 1, July 1 and August 1, would be up a combined 15%.  Again a return hedge fund managers would be quite comfortable with.

Some More Insanity

Apple is the first company to reach a $2 trillion valuation! 

Tesla is a $370 billion company. Giving them a similar market value of Ford, GM, Chrysler, BMW, Mercedes and Toyota all combined (~$376 billion). 

Netflix had a great 4th Quarter, but the Street expects more

Netflix reported its best quarter EVER and Wall Street yawned

Netflix forecast 7 million new subscribers in the quarter and came in at 16 million. By far their biggest quarter EVER.

They guided to 7.5 million in Q2, which would make that their biggest Q2 EVER.

Corona Crisis is a godsend to Netflix and will accelerate their growth and dominant market positioning.

Obviously we all expected Netflix to exceed guidance this quarter. It was conservative to begin with and people around the world were ordered to stay at home. Some even predicted double digit subscriber additions, but nobody predicted 16 million. 

So why didn’t we see a huge rally in the stock price? In fact, it actually went down! 

A big (1) is management muted the good news by implying that Q3 and Q4 subscriber numbers would be lower due to a “pull-forward” of demand. 

(2) Streaming Wars competition is still a concern and 

(3,4,5…) questionable pricing power given competition, foreign currency headwinds hurting revenue and negative cash flow. 

Pull-Forward of Demand

This is a phenomenon that Netflix has been talking about for years; usually after they crush guidance, but I cringed when I read the following in the investor letter.

Some of the lockdown growth will turn out to be pull-forward from the multi-year organic growth trend, resulting in slower growth after the lockdown is lifted country-by-country. Intuitively, the person who didn’t join Netflix during the entire confinement is not likely to join soon after the confinement.” 

They may be right, or they may not be. But, for the long-term outlook it doesn’t matter: People all over the world will continue to sign-up and pay for Netflix, because their price-to-value proposition is incredible and recession proof. 

Netflix now has over 180 million households paying for its service; so probably 3 – 4x that number of people watching. As more people join the Netflix ecosystem, Netflix will benefit from “network effects”, like Facebook. Meaning if all of your friends are talking about a particular show, you will feel compelled to also watch that show and participate in the social conversation. #TigerKing. #LoveIsBlind.

Well guess what? After the lock down a lot of people are going to be talking about Netflix shows, which will drive continued demand and new sign-ups. 

Corona Crisis is accelerating secular trends, including remote working, movie theater death and cutting the cable cord. All three actually bode well for Netflix. Globally consumers were already moving to streaming over cable and because of global stay-at-home orders we are seeing a mass acceleration in the global adoption of Streaming.

AT&T, Verizon and Comcast lost 1.5 million subscribers in Q1, while Netflix picked up 2.3 million in the US and Canada. Some haters even predicted Netflix would actually lose domestic subscribers in 2020.  

Streaming Wars Competition

Two areas must be mastered at global scale to compete with Netflix: Technology and Content.  

Amazon and Hulu are the biggest incumbent competitors but they’ve been around for many years and have not impeded Netflix growth. Also, worth noting Hulu is only available in the US and Japan. So who are the new entrants? 

  • Disney+
  • Apple TV
  • AT&T’s HBO Max (or is Now or Go?…so confusing)
  • Comcast’s Peacock

HBO and Peacock are “wait and see”. They’ll probably be ok, but the reality is (1) they are encumbered in profitable legacy businesses (broadband, cellular, cable TV, etc…) and therefore need to navigate corporate bureaucracy and innovators dilemma that will inevitably slow their path (remember Netflix is so focused they split off their DVD division and they have no other operating segments) and (2) they both lack a global technology infrastructure, one that Netflix has been building and optimizing for 10 years. 

Apple TV has the global technology infrastructure and they are off to a great start with original content. They also hired Richard Plepler the former head of HBO to a five year contract; a clear signal they are in for the long term and committed to quality. Their biggest issue currently is lack of content; most people would be hard pressed to name two original Apple shows. Nevertheless they will grow over time, but will be many years if ever that they are a substitute for Netflix. 

Disney+! 

This is the juggernaut that many expect to knock Netflix from their perch. They have global brand recognition and possibly the most valuable content library in the world (particularly when considering their acquisition of Fox). They have passed 50 million subscribers in less than two full quarters. Some question the authenticity of this number as many signed up free thru Verizon in the US and 8 million were automatic via their HotStar business in India. Nevertheless, it’s a meaningful number. 

Compelling content?

Disney’s global technology infrastructure is weak and will slow global adoption. And while the Disney Corporation owns a lot of great content it is fragmented and licensed to local providers around the world making it difficult to simply “make available” on Disney+; which is why their catalog is thin. In fact, their catalog is largely kid’s content and some blockbuster movies from Marvel and Star Wars. (Pictured is the content they pushed to me via email last week…not exactly compelling). So in short, Disney needs to spend more building their technology and global distribution platform and they need to sacrifice profitability in the short term to build their streaming library and business.  

This is where Covid-19 comes in like a wrecking ball. Think about Disney’s big businesses where the profitability comes from: 

  • Disney theme parks are closed. 
  • Disney cruise ships are docked. 
  • Movie theaters are closed.
  • Network advertising down significantly.  
  • ESPN has no sports.

Disney has gone from Streaming Rookie of the Year to a company that literally could be battling to survive the next few months. 

Covid-19 won’t kill Disney, but it’s mighty painful. 

Other Headwinds Mentioned Above

Cash Flow. Important to acknowledge here is Netflix management (Reed) chooses to be cash flow negative in order to accelerate global expansion and dominant position. This has been a smart move. Finally though, and somewhat a nod to nagging investor concern, Netflix has stated and confirmed that 2019 was peak negative cash flow. Now it’s possible that during 2021 Netflix will flip to positive cash flow, causing a number of value investors to come into the stock and drive up the price. (Netflix actually had positive free cash flow in this quarter, but it’s due to shutdown of productions, which by the way should have no effect on 2020 slate).  

Pricing Power. This is a valid concern, but as long as Netflix incrementally improves the service they’ll be able to slowly raise prices over years. Think about this: A $1 increase in price globally generates over $2 billion of annual revenue.

Foreign Currency. Can’t do much here. But the negative short-term impact came from US Dollar strengthening during this global crisis. We’ll likely see foreign currencies strengthen when this is behind us. 

Conclusion

Back in July 2018 Netflix stock price hit $419. So here we are almost 2 years later and the stock floats around the same level, but with 60 million more subscribers and an even more dominant market position. 

My guess is that 2020 will be a record year of subscriber adds and new Netflix stock highs and more great original content! 

Thank you Netflix for providing some much needed relief and entertainment in these times! 

We’re going to get through this crisis and 12 months from now we’ll be stronger

No doubt this is a scary time. This isn’t just a financial crisis, like 2008-09, this is a global health crisis crippling our economy. We are reminded daily of:

  • New corona virus cases and deaths
  • Reports of hospitals full and running out of supplies
  • Unemployment rising and companies running out of money. 

This is all real and should not be minimized. 

However, we also need to recognize that we are making great progress and this will all end at some point. Our financial and economic engine is intact and when we neutralize the corona virus our economy – and stock market – should snapback relatively quickly. There will be some financial restructurings for sure, but restaurants and stores will reopen, people will go shopping, start travelling and return to work.  

Today New York announced the closing of all non-essential business and yesterday California announced state-wide stay-at-home provisions (many states will follow this weekend). These are necessary and very effective ways to mitigate the spread of the corona virus. This is good news that demonstrates we are taking this threat seriously and addressing it head-on. I hope that we’ll look back and say we over-corrected; certainly better than not doing enough.  

If you’re interested in some good news: 

On to the markets.   

During the 2008-09 financial crisis US Stocks fell 56%. As of today March 20, US Stocks are down 33%. There were reports today in the news that some big spending billionaires like Buffet and Icahn jumped into the markets.  

Be Greedy When Others are Fearful, and Fearful when others are greedy – Warren Buffet

I love that quote. Way easier to say than do. History shows, systemic shocks to our economy are always followed by significant economic and market growth. 

It’s very possible this is NOT the bottom and the market will go down more. A lot of people will be quarantined at home worrying over the next 3-4 weeks. However, it is likely the market will be higher 12 months from now than it is today. 

Overall, the US Stock Market is down 34% (green line) over the last month. Our Big 3 trillion dollar tech companies: Apple, Amazon and Microsoft have held up remarkably well down between 15% and 30%. Netflix has really proved resilient only being down about 14% (makes sense right?).  

One way of thinking about all of this is these stocks, or the whole market is “on-sale”. Now they could get even cheaper, but the real question to answer is will they go up eventually? There are a lot of companies that are really cheap, like Zillow, down almost 60%. 

Also, this is a great time to fund long-term investments, like 529s and IRA. Maybe 401ks, but don’t fund too early and sacrifice employer match.  

Can’t wait to see what next week brings.  

Stay healthy and positive!