The stock market has been selling off with The Fed looking to raise interest rates to fight 7.5%+ inflation, so could growth and tech stocks like Netflix and Google be on sale?! I discuss initial factors to consider with NFLX and GOOGL.
With inflation possibly even being as high as 15% and already baked into the real estate and stock markets, The Fed might have to hike interest rates faster and higher in order to tame inflation and this is causing a lot of tech and growth stocks to sell off massively.
This happens because as interest rates go up, other securities become more attractive to invest in, and people look for yield less in growth and tech stocks. In addition, with higher rates, people are less willing to discount the future earnings and pay more for the expensive “growth stocks” when they can get cheaper, “less risky” assets like bonds with almost respectable yields.
Therefore, some are wondering if stocks like Google and Netflix could be on sale right now and if there are buying opportunities with these stocks in particular.
The last I checked, NFLX was trading around $390 per share, and GOOGL/GOOG was trading at around $2700 per share.
Before we make any investment decisions, we should carefully consider the investment factors and risks with these particular stocks.
While both Google (aka Alphabet) and Netflix have taken a hit to their stock price, they are drawing news headlines for totally different reasons. Google’s stock has been on the rebound because they recently announced a planned 20 to 1 stock split, set to take place after the 4th of July holiday if the Board of Directors approves it.
Right now, Google is only off about 12% of its all time high of $3042 per share. This is in contrast to the decline of Netflix’s stock price where in their recent earnings call they projected weaker subscriber growth of 2.5 million in the current quarter compared to Wall Street expecting 6.9 million subscribers.
The idea that there will be much less new subscribers in Q1 2022 sent NFLX tanking by 20%, and now they are off 44% from their all time high of $701 per share.
Even though price to earnings (PE) ratios aren’t that meaningful, Netflix’s PE is around 36 while Google’s PE is around 24. At face value this might make you think that Google is cheaper than Netflix, but I suggest the following reasons as to why Netflix might be slightly more compelling than Google’s stock is right now.
Famous hedge fund investor Bill Ackman of Pershing Square Holdings recently bought 3.1 million shares or around $1.1 billion worth of Netflix in January 2022. In addition, the Co-CEO of Netflix Reed Hastings bought more NFLX as its stock price tumbled. These are very bullish signs for Netflix, and we don’t see any insiders meaningfully buying more Google — if anything they are selling shares.
These are just a few of many factors to consider and to do way more research in.
The bull case for Google is pretty strong as in 2021 they delivered monster revenues of $257 billion and 40%+ growth rates, including in cloud services. Google’s moat is strong as they have dominant market share in search and in YouTube video content streaming.
However, insiders don’t seem to be adding to their Google position, but rather are selling. There have also been mixed reports of slowdowns in digital ad spending, so definitely something to study more and figure out the trends in ad spending that could affect Google’s ad revenues.
In addition, looking at the 29 superinvestors on dataroma, 8 have been selling while 6 have been buying Google.
And as I’ve talked about in my video about stock splits, these shouldn’t really make a difference in a stock’s future trajectory. But when Apple and Tesla did stock splits in 2020, it caused many people to rush in and buy because it seemed as though the share price was lower, even though the overall valuation of Apple and Tesla was the same at that moment in time.
For some reason, psychologically, stock splits make the share price seem more appealing because it is nominally lower. If you bought one Google share at $3000 and it splits and you now have 20 shares at $150 a share, it mentally seems like you own more of Google at a more accessible price, even though it’s still currently worth the same $3000 in the markets.
Companies tend to announce stock splits when they are doing well and are expected to continue doing well. Usually things look like they are on the bright side when stock splits are announced, but it doesn’t necessarily mean it’s a buying opportunity. It warrants for us to do more research and due diligence before we were to just rush out and buy Google.
Whatever price is being offered at this moment doesn’t mean it’s the best price possible at which to buy the stock, especially if there are some future, unexpected events (eg stock bubble pop) that could potentially make Google’s stock price even more appealing than it is right now.
So that’s why it’s imperative to study the business and do valuation calculations before you buy any stock. Google is still pretty close to its all time highs, so I’m waiting for now until and unless I can figure out a good buy price.
In addition, with the advent of fractional shares, this means that people don’t have to go out and buy a whole share. There are many stocks available in a fraction of a share if you cannot afford a whole share, which might lessen the impact of stock splits.
Just like Google thrived in 2020 and 2021 when people were stuck at home and streaming, Netflix did the same as it generated significant revenues of almost $30 billion in 2021 and their subscriber count is around 222 million.
Netflix’s operating margins are 20.9% as of 2021, and they are looking to generate positive free cash flow this year, which is a pretty good sign.
In addition to weaker subscriber growth, Netflix’s stock got hit because they have to hike prices, and even though it’s only a few bucks, it could be a meaningful difference to consumers. Especially when there are other competing streaming services like Disney+ and Apple TV+ nipping at Netflix’s heels.
With Netflix spending almost $18 billion last year on new content, it’s important to analyze the projected future capital expenditure outlays that Netflix will continue to have.
And we may also want to figure out why Bill Ackman and Reed Hastings think Netflix’s stock is at a good buy price now, but also question if these are the best on sale prices for Netflix if you are interested in this company?
As just a hunch, I suspect that Bill Ackman may have averaged a Netflix buy price of $375 per share because Pershing Square was buying it during the week of January 21 through January 25 where the stock price ranged between $360 and high $390s per share. This is just ballparking and isn’t confirmed anywhere. Bill getting a 46% discount on Netflix compared to its all time high seems to be not too shabby, but that’s not to say that $701 per share was Netflix’s full intrinsic value necessarily. Reed Hastings recently bought Netflix at around $389 per share, so studying Reed Hastings as a manager is also important to do in order to figure out the bull case for Netflix.
If you’re interested in learning why Bill Ackman is so bullish on Netflix, I encourage you to visit his Pershing Square Holdings fund’s website and read his latest letter and presentation to shareholders. These works include his rationale about how Netflix made a successful transition from DVD rental by mail to video streaming to producing high quality content many people love. I also highlight what he wrote about their subscription-based, highly recurring revenue business model.
Bill Ackman is a very concentrated investor like Warren Buffett is as it seems like Netflix might be Pershing Square’s 7th equity position now. We can learn more about his 8 investing principles and checklist from various sources online.
And just for information purposes, I observed that Google is trading at double where it was in 2019, and Netflix is pretty much back to where it was trading in 2019. Also, if you’re interested in Google, you may want to decide if you want the voting shares (GOOGL Class A) vs non-voting shares (GOOG Class C).
If also look at Dataroma, among the 9 superinvestors who own Netflix, it’s a wash with 3 selling and 3 adding, but who knows if more will have bought or sold in Q1 2022 as the stock price got massively reduced. That would then be a bullish sign if more investors believe in the future growth story of Netflix.
Both Google and Netflix continue to innovate, with Google especially in cloud and artificial intelligence services, and Netflix in the media entertainment industry. I’m sure they will continue to grow their areas of expertise to lead to the great products and services that continue to have a loyal subscriber base.
I’ll be putting these stocks onto my buy wish list and hoping I may be able to buy them at a price that I believe is appropriate. Happy Superbowl Sunday!
If you’re interested in learning how to take control of your finances and start becoming an investor like Warren Buffett, check out my free PDF guide.
I look forward to making more investor friends! Add me on Instagram: michellemarki