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from the drawbacks-of-being-a-public-company dept.
The Schall Law Firm, a national shareholder rights litigation firm, announces that it is investigating claims on behalf of investors of Netflix, Inc. ("Netflix" or "the Company") (NASDAQ: NFLX) for violations of ยงยง10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder by the U.S. Securities and Exchange Commission.
The investigation focuses on whether the Company issued false and/or misleading statements and/or failed to disclose information pertinent to investors. Netflix announced its second quarter 2019 earnings on July 17, 2019. During the Company's earnings call, as well as in its shareholder letter, it was revealed that Netflix gained only 2.7 million new subscribers against a forecast of 5 million new subscribers. Based on this startling news, shares of Netflix dropped by more than 13% over the next two days.
https://www.businesswire.com/news/home/20190719005440/en/
(Score: 5, Insightful) by AthanasiusKircher on Sunday July 21 2019, @05:00AM (12 children)
I'd just like to pause and consider these sentences for a while. I'd like to take a moment to reflect on how insane these sentences would sound if we were at all living in a world that was rational about how businesses should operate.
Infinite growth forever is simply impossible, yet for some reason stockholders in many situations seem to demand it. I realize that some people are seeing this lower number of subscribers as a sign of the ultimate demise of Netflix, but let's just read that sentence once again and realize this is panic over the fact that a company (only?) subscribed several MILLION new people!
Maybe this is a sign. Maybe Netflix will start to really falter or worse in the future. (And maybe Netflix even misrepresented some of its forecasts for nefarious purposes, in which case such an investigation may be justified.) But if Netflix does falter down the line, it will no doubt be partly due to irrational expectations in the stockmarket, which likely drive irrational and irresponsible behavior on the part of companies, chasing after returns that are unsustainable.
Netflix seemingly had a goal once of becoming a new sort of utility. In addition to your traditional electric and oil/gas and phone bill, etc., you'd pay for a rather comprehensive streaming service to watch video content.
And what is the character of utility stock in the market, traditionally? They are NOT growth stocks. They are stable stocks that pay dividends, etc. That's what you want in a reasonable utility -- a good company that can hold onto customers and provide stable service.
Now, I know the metric is somewhat different here, because it was viewed as a sort of "race" for streaming companies to become the dominant one. And if Netflix stops conquering the market, it represents almost certainly a move toward fragmentation. But, honestly, given licensing, fragmentation was almost always inevitable.
So what should a rational person expect of a company like Netflix going forward? A rational person would hope that Netflix would become standard enough and valued enough on its own that those who have a subscription retain their subscription, thus bringing in a constant revenue stream. A rational stockholder would be happy to get some dividends on a regular basis with a stable company.
But collectively, stockholders are very irrational. They demand things that are impossible, like unlimited growth forever. It's sad, because this sort of stuff ultimately drives bad developments for consumers. Because at some point businesses can't sustain growth -- so how do they keep up the illusion in the market? They start cutting back on services. They start cutting back on the quality of support they give to customers. They move jobs offshore to save money. They move production offshore to save money. They even (as we've witnessed with cable companies) frequently try to trick customers (e.g., with promotional rates, but no information on the "real" price) and provide completely unreasonable policies that care less about customer retention than about maximizing profit so they can show "growth" for the fictitious infinite growth machine.
I know there are other issues with cable companies, including monopolies where they have been granted them. But I haven't lived in a place that had only one option for high-speed internet in at least a couple decades -- and I've lived in at least a half dozen different "markets" for cable. The problem isn't just monopolies in some places -- it's that the industry "standard" customer experience has sunk so low that all options are basically equally terrible. That's how my experience has been for the past two decades. I have "options," but they are usually all terrible.
And part of the reason they are terrible is because companies are all trying to maximize growth and profit, and now they've cut back on the customer experience to the point that the entire industry is a black hole of despair for any customer that has to deal with it.
Obviously this isn't just driven by the stockmarket. It's driven by individual greed among corporate executives and boards as well. But I think if we lived in a more rational world with more rational expectations of companies, we might find that there are quite a few even among corporate executives who'd be pretty happy to just maintain profits from year to year, as long as they're taking home a big paycheck anyway.
I know it's not going to happen anytime soon. But it would be nice if you could occasionally see a company succeed because it continues to provide good service and retains customers, rather than because it participates in this infinite growth collective delusion.
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P.S. And yes, I realize there are other factors at work here: Netflix is problematic partly because it doesn't have complete control over its own "product." It has to license content, and content owners have been pulling back. But Netflix anticipated this years ago and has been trying to build up its own content as a selling point. It should be applauded for that strategy by stockholders. It's one way Netflix could head toward becoming a "utility" -- if some streaming service has ENOUGH of its own content that it has under its own control so that consumers want that one service, what are the other content producers really going to do? Are they going to live with a potentially much smaller subscriber base and risk becoming increasingly irrelevant as their influence dwindles, or are they maybe going to go back to licensing to a company with hundreds of millions of subscribers, even if the profit margin on the content is less? Would you rather sell 1 million views at $1/view for your content, or 50 million views at $0.20 or whatever per view? I'm just making up numbers, but that's the sort of calculus content producers will have to consider with dominant streaming services in the marketplace.
But if 2.7 million new subscribers in a month is "startling news" in a bad way under almost any circumstances for any company, then we might as well throw in the towel and just await the fragmentation of content no one really wants.
(Score: 0) by Anonymous Coward on Sunday July 21 2019, @05:20AM (7 children)
The assumption of infinite growth is totally rational when our central bank controlled economic system would collapse without it. If there are only $100 dollars in existence and I loan you it at 10% interest, where is that other $10 going to come from? It needs to be created out of nowhere or else someones going bankrupt.
So without infinite growth everything is going to collapse, in which case your stocks are all either worthless or you'll get bailed out like everyone else anyway. This is one of those things that the capitalism-blamers are meant to never comprehend. Your basic assumptions about how the system works are wrong, making you easy to scam.
(Score: 3, Informative) by AthanasiusKircher on Sunday July 21 2019, @05:38AM (6 children)
You don't understand basic macroeconomics. The money supply [wikipedia.org] is mostly made up of credit built on credit built on credit, etc. MOST of the money in the world is "created out of nowhere" and if everyone simultaneously attempted to withdraw it from banks, they would find out the vast majority of it does not "exist" in some sense.
Except that's not how "money" exists anymore, if it ever existed solely like that. Cash is the less typical version of money historically. Before there was cash, there were systems of credit in ancient societies. And people almost always charged for loans. Money is simply a unit of exchange, ultimately kept track of in books and ledgers and now on computers.
As for how your stocks for a stable company keep up with inflation, it's simple -- a company providing good service can periodically raise its rates comparable to inflation, just like every other service and goods producer does.
Who is blaming capitalism? I'm just pointing out the market is irrational. Capitalism is part of it, but I don't think irrational expectations are unique to capitalism. And as for the rest of your comment, I suggest you might calm down a bit, stop thinking everyone else is "wrong," and maybe learn a little about macroeconomics.
(Score: 0) by Anonymous Coward on Sunday July 21 2019, @05:51AM (5 children)
I'm perfectly calm. I'll keep acting like infinite growth is the rational assumption, you keep assuming otherwise.
Netflix in particular has obviously peaked, people will go back to torrents and other pirating methods when market fragmentation makes it too inconvenient to watch a few movies/shows in a row for a reasonable price. And once they are in the habit, the subscriptions will get cancelled first month by month based on whatever is on there, then forever. Their stock is priced for insane growth (p/e was like $130), so a slowdown in growth is a very bad thing for them... which is why it is dumping. If the peak is in, it will need to drop to ~$50 to have a normal p/e.
(Score: 3, Insightful) by AthanasiusKircher on Sunday July 21 2019, @06:14AM
You're almost certainly right that Netflix is overvalued, as are most stocks. That's typical in markets driven by speculation.
I wasn't at all arguing that selling Netflix stock is irrational at this time. I haven't looked at the numbers, but I have no reason to doubt your analysis which sounds about right. It's probably a good time to get out if one is invested in it. I was just noting that our metrics for company success are rather irrational.
And you keep on believing that "infinite growth" is a rational assumption. Meanwhile, I'll await the heat death of the universe.... :)
(Score: 2) by AthanasiusKircher on Sunday July 21 2019, @06:25AM (1 child)
Also, in case my last reply to you seems surprising, note that my original post was asserting the *collective* irrationality of investors. It may indeed be quite rational for individual investors to sell now (and if I had any Netflix stock, I likely would have sold it a year or two ago). The speculation may also appear to be rational for individuals too.
It's just collectively that all these actions end up with a market that ultimately works against the interests of consumers and indeed often against the long term interests of the companies.
(Score: 0) by Anonymous Coward on Sunday July 21 2019, @06:42AM
Sure, just like publishing bs instead of science works against the interest of humanity and even the individual researcher. But if you make sure people need to do it to keep their career you'll get bs 99.99% of the time. I mean this will likely destroy our cultural environment long before humans can destroy the physical environment, but that's what we got once the government started dominating research.
(Score: 1) by khallow on Monday July 22 2019, @05:18AM (1 child)
Not even wrong. Nobody brings up "infinite" economic growth like it were rational. So you're going to act like an irrational thing were rational?
(Score: 0) by Anonymous Coward on Tuesday July 23 2019, @01:18AM
Yes, that is the crazy world central banking has brought us.
(Score: 2) by AthanasiusKircher on Sunday July 21 2019, @05:26AM
(Oh, and just to be clear -- yes, I do realize that Netflix had a net loss of subscribers in the U.S., and only gained globally. But contrary to some people's belief: (1) the U.S. is not the only thing that matters, and (2) Netflix introduced strategic price hikes in the U.S. which were designed to bring in more revenue to fund more original content, and it's pretty reasonable to expect some people to cancel when the price goes up. I"m not a huge Netflix defender, by the way -- I rather liked its streaming lineup better when they focused on more obscure and older films as they did in the early days of their streaming -- I just find it bizarre that people are seeing the "endtimes" in a company that is both increasing profit and overall subscribers.)
(Score: 0) by Anonymous Coward on Sunday July 21 2019, @06:12AM (1 child)
It's not that investors expect infinite growth, it's that their recent stock price had the expected growth built in. When that did not come to pass, investors thought it was overvalued and sold.
If they're not growing, they can let the stock price stagnate and pay out their profit in dividends. Assuming they are making a profit though.
(Score: 2) by AthanasiusKircher on Sunday July 21 2019, @06:36AM
I just said this in response to another comment -- I didn't at all mean to imply that that individual stockholders' decisions to sell stock at this time were irrational. I'm instead arguing the whole system is irrational, including the speculation that drove the price up in the first place, now causing some of the speculators to bail.
Mostly, I was just commenting on the analysis of this situation and how we've ended up in crazy places where we respond this way to companies that are in fact growing. This wasn't in some ways about Netflix at all... if I had more sleep recently I should have posted this as a journal entry about economics in general rather than a comment here.
(Score: 2) by Chocolate on Sunday July 21 2019, @12:12PM
Okay, put like that, this action sounds insane.
Yes, if they wanted traditional stocks with profits this is probably not the company to invest in.
Maybe they thought this was the next Facebook or LinkedIn so were getting in on the ground floor with expectations of unicorn inducing profits which kind of falls apart when no miracle happens.
Rock on, Netflix.
Bit-choco-coin anyone?