The blowup in Netflix has been epic on multiple levels and provides a great reminder for what I would call a very old lesson about investing in certain stocks. Netflix is, was and always will be a fad stock in my opinion. This can be even in the face of a very useful or convenient product but not all fad stocks have something as convenient as Netflix as their main product.
There have been a lot of these over the years of course some of which you may not even remember and at the very least you have not thought about how hot these stocks were both in price action and media attention. Do you remember how hot Snapple was once upon a time? Bottled ice tea trading like it would change our lives.
What about Andrea Electronics? Do you even remember that one? I don't recall what the product was but it went wildly parabolic in its 15 minutes. Comparator was another one from way back when. Of course there are many others as well.
The first AOL.
The nature of these tends to be the same in that there are always a lot of people who make a lot of money in these on the way up. The story is always compelling in one way or another as potentially life altering (in a good way). As I've said many times the actual internet has far exceeded the hype from the mid 1990s but it did not have the expected result on the stock market as many related stocks are trading at a fraction of their share price from 12 years ago and many others of course disappeared.
At some point for no reason (or any reason) the music just stops. Netflix is down 72% in three months which probably means the music for this one has stopped. Assuming the party is over for the stock the service is still very convenient which will always have a decent appeal (I realize subs went down a little over 800k) but maybe the future is that at some point it gets absorbed into another company or competitors come into the market offer something that, as far as the end user is concerned, is the same service.
When the music does stop people get crushed. The people getting crushed is always some combo of people who held on too long with too much and people who got in very late.
There will be stocks like this of course that come along in the future. The strategy here is quite simple which is sell some as it whizzes higher. You don't have to sell all of it but selling a 1/4 or 1/3 or 1/2 of the position every 50% or 100% or any other strategy is a good way to make sure the eventual implosion that you probably won't see coming (and good for you if you do) doesn't do you in. Had you tripled your original investment in NFLX and then reduced your position by selling 2/3 of your stock by virtue of making a couple of sales on the way up, then the current implosion is far less of a traumatic event.
The above example may seem ludicrous but it is far from impossible that that some stock you own goes parabolic for whatever reason making some sort of risk management prudent. If you start with the assumption that this one is not different and that rules of risk still apply then you can still do very well and not give it all back.
Wikinvest Wire
6 comments:
I thought aol was a fad and never thought the valuation made sense.
but what about apple? products are fantastic, but a lot of the potential is having a lock on how people will buy music, movies, books, etc. there are huge profits selling that stuff. laws can change and apple could lose the lock on distributing content to amazon or whoever.
similarly facebook has a lock on users, but if facebook screws there users by mining and selling info on the users a backlash is possible in the future.
kodak had a real product and they are gone.
THINGS WILL CHANGE
SEG
I would never own a company like this one as it is impossible to establish a valuation of it.
Having said that, it is a great service and will likely continue to exist at least in some form.
The failure is a management failure. A unique blend of arrogance and incompetency. If I were a stockholder, I would be calling for their heads.
Crocs (CROX) immediately comes to mind! One bad escalator trip in Japan and this fad stock got crushed...thank God for trailing stop orders.
Lots of examples out there today - CMG, PCLN, GMCR, ACOM, etc.
Companies like Netflix and AOL remind me of commentary by Ralph Wanger as he traced the history of the railroads in one of his columns.
The railroads were a major influence in changing U.S. commerce and development as they expanded rapidly in the late 1800s.
But, the vast majority of those railroads went bust.
The companies that made money were the ones which sold picks and shovels to the railroads to carry out that expansion.
Sent to me by a friend re. Occupy Wall Street protestors:
The folks who are getting the free stuff don't like the folks who are paying for the free stuff,
because the folks who are paying for the free stuff can no longer afford to pay for both the free stuff and their own stuff.
And, the folks who are paying for the free stuff want the free stuff to stop. And the folks who are getting the free stuff want even more free stuff on top of the free stuff they are already getting!
Netflix, like companies that are dominant in their niche (eg IBM, HP), or empires that control the known world, or individuals that can do know wrong (Madoff, Paulson), fell into the trap of arrogance; of believing that they are so good that they can raise prices or invade countries at will. Netflix' loss of subscribers and their Quikster foray shows that Netflix management made the same mistake, and therefore, well, they are paying for it. So add this to your toolbag of stock analysis .... measurement of arrogance.
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