“The markets seem to be diverging. There are the growth stocks that are getting wrecked like Netflix (more below) and then there are the defensive safe companies seemingly hitting all-time highs every day like Costco. The Dow which is home to blue-chip boring companies P&G, Johnson & Johnson, just continues chugging along with not much changing. On the other hand, The Nasdaq which is home to your high-flying tech companies like Netflix or PayPal (both down over 50% this year) just looks like a scene from 300. BLOOD EVERYWHERE. Then you have the S&P 500 which has both of these companies, so it just kind of lands somewhere in the middle. This is why we love the S&P 500.”
… is what I wrote Thursday afternoon before Papa Powell did Papa things and destroyed the markets.
Tale of the Tape
Economy
Papa Powell vs Inflation
Papa Powell, Chairman of the Federal Reserve said during an interview with the International Monetary Fund,
Was this a surprise to anyone?
No
But shortly after his comments, the stock market fell on Thursday and much more on Friday. While the 10-year Treasury yield rose.
My Reaction:
Stock Earnings
I don't think an earnings report could be any worse than what I saw with Netflix (It can and will be for a bunch of companies this quarter). Things are looking hella dire for the company post-pandemic. Seems the pandemic accelerated their growth and they have hit the cap on the number of subscribers they can have. Brings to mind Howard Marks' quote, “Trees don’t grow to the sky”
Check out that stock chart for the year:
They reported a loss of 200,000 subscribers in Q1 of 2022.
The first time in over 10 years, since they did away with DVDs
They also said they expect to lose another 2 million by the end of Q2 2022
They blame the losses on password sharing
Over 100 million households use a shared Netflix account.
They are beginning to crack down on these accounts to get people to pay for their own subscription package.
They also said having to leave Russia cause the loss in subscribers otherwise they would have added 500,000 new subscribers
However, they reported growing cash flow and net income from the business
Their cash position grew from $692 million to $802 million for Q1
Net Income (something Netflix has never had) was $1.6 billion for the quarter
There are two ways investors can digest this information
The Positive Spin
The Business is finally generating cash and has rounded the corner on being a loss leader
Netflix can increase prices and consumers are willing to accept those price increases
There are still a lot of cable subscribers that can cut the cord and join Netflix
Internationally once broadband internet is more widely available Netflix will pick up growth once again
Netflix could do an ad-supported level to get people on the platform
The STOCK is just so DAMN CHEAP!! Everyone is overreacting
The Negative Spin
This business model does not work. Netflix has to continuously spend $17 billion to maybe make a show people will watch
The increase in subscription prices and password share crackdown show that Netflix does not see a path for growth anymore
There is too much competition and a variety of streaming services for Netflix to stand out
The fact that Netflix is even considering bringing ads into the platform shows how desperate they are
STOCK IS TOO EXPENSIVE!!
My takeaway: Notice how the exact same data point can be used either in an argument for or against something. My stance is Netflix will not go bankrupt and there will be a point where the stock will be too cheap to ignore. Name Brand is a very powerful thing and unlike other streaming platforms, Netflix has been able to crack the international scene. Plus what is the alternative that gives you the amount of content for this price? Maybe Disney?
But Netflix, please do not add ads or start doing week to week. ABSOLUTELY NO ONE WANTS THAT!! Ignore what people say and pay attention to what they do. How many of us actually watch a show week to week, that is not Mandalorian? Hulu is slowly dying with its ad model, as more shows get pulled.
Here is the rest of the Howard Marks quote:
Trees don’t grow to the sky, and things rarely go to zero. When everyone believes something is risky, their unwillingness to buy can sometimes reduce its price to the point where its not risky at all.
I doubt Netflix is a business worth ZERO or as low as people now are viewing it. At some point, this business will be low enough that I will have to take a swing at it. In the end, the most important thing in investing is the cash a business is able to generate.
LESSON: Things are hardly ever as BAD as headlines love to make it. Always go deeper
ELON
ELON
ELON
ELON
ELON
NEED I SAY MORE
This company keeps breaking my mind at the crazy things they are able to do. I have one mind-blowing stat for everyone
Tesla has a Gross Margin of 32.9%
Meaning for every dollar they make, the company keeps 30cents (before taxes)
Now that may not sound amazing to you until you realize that the typical car manufacturer has a gross margin of 5-10%
Tesla made $3 billion in net income in Q1 2022 more than Stellantis (owners of Chrysler, Jeep, Dodge, Fiat, Maserati, Citroën, Peugeot, Opel, and many other car brands) has ever made in its entire history of car manufacturing.
THIS IS NOT SUPPOSED TO BE HAPPENING!!
Tesla has done something only Apple has been able to do.
Which is being a hardware company and having software-like margins.
My Reaction:
Random Interesting Facts
The median price of existing homes in the US.
This is an all-time high according to Realtor.com
Homes are up 15% in the last year
MORE THAN STOCKS in the same period
Combine this with interest rates now above 5%, the average borrower is paying about 38% more for a house than they would have one year ago.
THIS IS NOT SUPPOSED TO BE THE CASE
But with supply remains stubbornly LOW
Investors buying up homes to turn them into Rentals.
The whole thing is a mess
My SOLUTION: I need the government to step in and FLOOD the housing market by incentivizing buildings like they did in the past with the FHA and Housing Act. This will cause a crash in housing but I DO NOT CARE. (I say this as someone who just bought a house). But I would rather have a short period of pain than for people not to be able to have places to live.
Housing is not a “nice-to-have”. IT IS A MUST-HAVE!
Too bad no government official will ever do this because old people own homes, and old people are in office, so why would they want to hurt their assets.
In the meantime for anyone who wants to invest in Real Estate but can’t afford these crazy prices or you live like in Cali or New York, you can use other options like FundRise or DiversyFund (I use both)
These are Real Estate Investment Trusts that own rental properties such as homes and they pay those rents out in the form of dividends
Yes I AM part of the problem
People have fled from Ukraine since Russia invaded
Putin is still a DICK and an A$$h(fill in the rest) just a reminder
Looking Ahead
Stock Earnings
FAAMG bares its teeth this week
All Five Big Tech Companies report earnings this week. The main thing to note is, as these companies go so go the markets. Combined they used to make up a quarter of the S&P 500 but Facebook messed that whole thing up 😔. So now I have to say, combined they make up “around 20%” of the market.
Just isn’t as sweet to say.
Anyway, two companies to be especially aware of are Apple and Microsoft. They have basically kept the market from going into a full-blown crash. If their earnings do not meet expectations or they announce lower guidance.
Watch OUT!!
If that happens the S&P 500 will finally be fully in a correction, and the NASDAQ will be in a full-blown crash.
And I will be EXCITED!!
Why? You might be wondering?
Because I am a FORCED BUYER of stocks for the next 30+ years. I want Great Companies at CHEAP PRICES!! I want more bang for my investment buck. So this would be a celebratory moment for me.
Should be a FUN WEEK!!
Totally Unnecessary Man U Update
Can the season just be OVER, PLEASE!!
Thank God for the NBA Playoffs
Thank you for Rocking With ME
See y’all right here on Wednesday
Also, if you enjoy the newsletter SHARE IT.
Remember GENEROSITY > greed
God bless Each and Everyone of y’all
✌🏾