Pity the poor FAANG stocks, all of whom have been taken a beating in recent weeks —all but Netflix (Netflix Stock Quote, Chart NASDAQ:NFLX), that is.
But investors should be cagey about putting their hard-earned dollars on the streaming giant, says portfolio manager John Zechner, who thinks that with the emergence of legitimate competition in names like Disney and HBO, Netflix’s first-mover advantage is all but over.
“In Netflix, I’m seeing a very similar story to what we’ve seen in Tesla,” said Zechner, Chairman at J. Zechner Associates, to BNN Bloomberg on Tuesday. “A great growth area —streaming is clearly the way people are watching now— but you’ve had one company with first mover advantage who has a substantial market capitalization, and I don’t think that they’ll continue to own the industry.”
“Moreover, it’s the financials. They’re generating huge negative cash flow. They’re spending $9 billion on content this year —and I think they’re going to have to continue to do that,” he says.
“For me, I don’t watch as much Netflix as I used to because there’s HBO and other offerings out there,” he says. “So I think that there’s a risk that the first-mover advantage will disappear.”
Netflix’s share price has been more or less travelling sideways since early February, and that’s after posting strong gains to start off the year. Now trading in the $350 range, the stock remains well the $420 high it set last June, but investors can take heart in the fact that unlike its FAANG cousins like Google and Amazon, the recent ramping up in concerns over trade with China and impending regulation hasn’t torpedoed NFLX.
The streaming giant once again performed adequately in its latest quarterly earnings, delivered in April, where its first quarter 2019 featured revenue of $4.52 billion and EPS of $0.76 per share. That’s compared to analysts’ expectations at $4.50 billion and $0.57 per share. But while the company grew its subscription numbers both domestically and internationally, management’s guidance was tepid, calling for Q2 earnings of $0.55 per share whereas analysts were expected $0.99 per share. (All figures in US dollars.)
At the time, Netflix management said it didn’t believe that its prospects would be tangibly impacted by a rise in competition, arguing that the move to streaming services is still ongoing and that Netflix’s content will set it apart from the rest.
“We don’t anticipate that these new entrants will materially affect our growth because the transition from linear to on demand entertainment is so massive and because of the differing nature of our content offerings,” Netflix’s management wrote.
Zechner says he is shorting Netflix and hedging with a long bet on competitor Disney, whose Disney+ service will come online in November.
“On any good hedge position, you’ve got a short and you want to offset with a long, like we had GM for Tesla,” says Zechner. “And on this one, I’m going long Disney.”
“There are a lot of other players out there but you’re getting Disney, probably at a 20x multiple, and in terms of content, there’s Lucasfilm, Pixar, the Marvel franchise, all the new Fox assets,” he says.
“It’s a similar story. You’ve got the growth industry there but [with Disney] you’re getting it on a much cheaper basis. It’s a straight-up trade on the hedge fund, short on Neftlix, long Disney against it,” he says.