It would definitely affect their long term forecasted growth rate/valuation, unless they baked into their forecast bad harvests. The reason is because a bad harvest means lower earnings which means lower internal growth rate which means need to take on debt to sustainably continue to grow at 10% per year. Higher debt means higher interest expense and lower overall long term valuation.

Edit: you can easily do the calculation to see how much less its worth long term pre/post bad harvest if you have specific numbers

Well that seemed to be the implication here. I talked about the growth story (clearly in this context, it's about subscriber growth, not stock price growth) and chytry claimed that the growth story is over.

That makes no sense even if I knew nothing about how the tech world worked - why would they be "less risky" if their earnings are the same as before? And I happen to know how things work in tech and and I already explained in detail exactly what's going on and what those vague words mean. Again, you should try to learn when people who know what they are talking about are explaining things to you, instead of reflexively rejecting everything.

Logic is correct but the magnitude of the impact is so small it's almost completely irrelevant. For Netflix you would need extremely aggressive assumptions to get to 1% lower average future earnings because of this impact you describe.

Because their earnings are the same as projected despite a more than doubling of their forecasted new subscriptions.


You don't know your ass from your elbow.

That's fair. I haven't done the math but it depends on the impact. Regardless, I never claimed Netflix is overvalued. My contention is that the overall markets are in hyper-bubble territory.

These are mostly irrelevant questions and it's already been explained why they are irrelevant. All the ironic preaching about business experience aside, you don't seem to realize that growth companies are valued holistically as businesses by people that understand the context, not by finance neophytes just plugging in numbers into a context-free model.

However,

While this is irrelevant as asked, we can flip it to make it more relevant - how much of the miss in long-term earnings forecasts from the dot-com boom was due to the recession that followed?

Again, why is this a reason to be less risky? What risk are you even talking about? And why should anyone be concerned?

Edit:

So with respect to "number of product innovations" - do you know that this varies substantially from one tech company to another, even within the same space? Some "try" almost everything, others have a rigorous internal process such that few things get tried. This has nothing to do with the overall R&D spending - they are just temporarily moving from one part of the spectrum to another. So far, no one's really been able to demonstrate what's better in what situation. Do you even know which companies lie where on the spectrum? This should concern zero investor.

That's just another way of saying they value them intuitively (as opposed to in terms of money which is calculated with mathematics, and statistics) which is now the new stupidest thing you've ever said.

According to you, none, since

In reality, higher interest rates that popped the speculative bubble hurt the long term growth of the companies that survived, and forced revaluations of the companies that didn't, because their long term valuations were pure baloney. After all, that was Greenspans intent when he raised them.

But what about the actual recession? How much did that hurt for, say, Apple, Microsoft and Amazon in terms of their long-term future?

No this isn't what I meant at all. Regardless of whether people are using mathematical models or not - I'd hope any value investor who's investing large sums have some sort of financial model so that they at least understand what it is that they are implicitly betting on and what their implicit assumptions are - the point is that people can adjust for context. You could have a sophisticated model that values companies based on long-term growth that is sensitive to different types of growth headwinds in different ways. The point is context matters - if you're using a model, you should understand its limitations. If you're doing calculations in your head, you should understand the implications.

The only way short-term headwinds like this (again assuming no fundamental changes in the long run) result in large valuation changes (again, ruling out things recapitalization and discount rate changes) is if you have an extremely flawed model (again, whether in your head or on a computer) into which you blindly plug in numbers. This is how you end up asking a bunch of questions about how recessions affect long-term growth and so on - you're focusing on irrelevant stuff because your mental model is flawed. I don't know exactly which error it is but the most likely one is that you're implicitly projecting what should be short-term adjustments indefinitely forward. We talked about how Netflix bringing future subscriber growth forward doesn't matter that much - but the reverse is true as well. COVID-19 deferring growth also doesn't really matter in the grand scheme of things.

No one modeled this, that's the entire point. Nothing like this has ever happened before, and you have as much idea as I about the "term" and degree of the impact.

We went from a predictable situation (which, ahem, are what forecasts are) to a totally unpredictable situation overnight. Your claims all throughout the thread that analysts have accurately forecasted effects of something that's barely started and is unpredictable and that market valuations are pretty much where they should be are ludicrous. Actual analysts don't even claim this.

I know of no reputable person who genuinely believes the market is accurately valued. If you'd care to post some, I'd be genuinely interested.

honestly, look at dividend futures........... 5 years out doesn't get back to dividends before this happened.

there is going to be knock-on effect for the economy....... people will spend alot less on certain things, and not just things that involve crowds (i include discretionary shopping mall spending here)

saskatchewan wheat pool had 1.5 years of drought and went bankrupt. one year of drought is really bad.

one counter-argument to the market being really overvalued is that its equity duration is probably 30-35 years (meaning that the next 5 years doesn't make up a large % of the market's value)

What do you mean by "no one modeled this" - almost everyone's financial model includes COVID-19 impact at this point. Even just for basic operations, every reasonably-sized company will have internal financial projections to guide their spending and these projections will include some variation of COVID-19 impact that also accounts for some level of uncertainty. No one projects exactly one scenario either - it will be full of inputs and knobs so that they can deal with the worst case scenarios and also understand the changes in situations over time.

The level of uncertainty is greater than usual and it increases the error bar of any projection but it doesn't completely invalidate all projections. But I don't think even the worst case scenarios (I don't know what that is, maybe US GDP -20%, Global GDP -10% for the year?) meaningfully change where these companies end up in 10 years.

I don't know what you mean by "reputable person" but most people who understand finance don't think in terms of "the market is accurately valued" - the market value is what it is and it reflects the relationship between various asset classes. Future expected returns are lower than average for nearly all asset classes at the moment - pick your poison. If you think a particular asset class will outperform, please share your reasoning.

More on Netflix and why it's rather clear that their statement on trying fewer innovations isn't about financial risk:

https://www.bbc.com/news/technology-52777365

"Netflix says it will now start to cancel accounts that have watched nothing in more than a year, but have still been paying subscription fees."

The biggest feature they are releasing is going to have a significant negative impact on their earnings.

"Netflix said less than half a percent of its user-base falls into that category."

They are making it sound like it's not a big deal, but if you're focused on the financials, it is. 0.5% of their revenue (these people cost them nothing) would be roughly 4% of their net income. It may even be more than 0.5% since their inactive accounts are likely disproportionately older accounts in the US (which pay more) rather than newer accounts in the rest of the world (which pay less).

Netflix isn't thinking about its short-term finances - it's thinking big about the future. They are thinking about how, once this feature is widespread and well-understood, there will be even less friction to signing up. It's also a message to its internal teams to focus on adding user value over short-term hacks. Lots of dead accounts that are paying is great from a financial perspective in the short or even medium term, but they understand that relying on revenue that is detached from value isn't how you become successful in the long run - that's how you become AOL and Yahoo.

Btw, I don't mean to recommend NFLX - it's a really well-run company but the stock is kind of expensive, they face stiff competition in all directions and their pricing power isn't that strong on either end - content acquisition or subscription prices. I'm just using it as an example of why these types of companies are typically always focusing on the long term and investors should (and typically do) follow, as long as there are no existential threats on the horizon. For tech at this scale, existential threats are rarely short-term business cycles and usually about being disrupted/replaced by others.

Lol.

I don't know what you're lol'ing at but it's a bigger deal than, for instance, the stronger dollar wiping out the earnings gain from the larger than expected increase in their international subscriptions, which is why you thought Netflix is being risk-averse and "temporarily reduced the number of product innovations we try." Exchange rates are going to fluctuate and their impact will net out over time but the revenue lost from auto-canceled subscriptions is recurring.

Have you read Netflix financial statements or listened to the latest earnings call?

Hertz bankruptcy

According to one forecast, global online video revenue should be $129 billion in 2023. 26 billion of that is China so that's out. Global pay TV is 200 billion and going down. Now subtract all the global competitors and realize this is a low margin industry and NFLX has no franchises on which it can build (unlike Disney for example) and doesn't sell ads (unlike Google or FB). In addition, if it wants to attract the much hyped international subscribers, it needs to increase spending on local production and marketing going against local competitors. And this is in markets much more sensitive to pricing. E.g. in India the premium package is 40% cheaper than in Europe. And then you have the currency headwinds, which are gonna be massive.
Now what revenue multiple do you think NFLX will have when its growth effectively stops and it still can make no money?

As expensive as the stock is, the fact that it's hasn't moved up for almost 2 years now is a tell.

No and I don't think you'd get a sense of how these companies operate by just looking at the financials. If, as a total outsider, you want to understand how these companies operate, you should probably read strategy pieces aimed at product people or VCs in tech. You have to understand the business first.

This is getting kind of off-topic as these are very specific to Netflix. Not sure where this can go but happy to discuss this elsewhere or whatever.

If you did this analysis for Google in 2004, would this have fairly valued Google's long-term opportunity in online advertising? What was global digital advertising revenue in 2007? What is it in 2020?

Why is this going down?

This is still part of their TAM.

What are the factors that make this a low-margin industry?

Is there much evidence that strong franchises provide meaningful differentiation in this space? HBO has had great franchises and Netflix has completely obliterated HBO. Netflix's scattershot content approach seems to be working well on the whole. Anecdotally, Netflix never has anything I'm specifically looking for but it has enough of everything that it's almost always where I go for content discovery. I derive more value out of it than any other service and it's not even close. My general feeling is tthat Netflix can create more user value out of any given content than anyone else in this space. While they are not currently able to capture the additional user value, but in the long run, this isn't a big deal - a lot of people were concerned about Google and Facebook's ability to monetize the value-add, this didn't prove to be problematic in the long run.

Is this a long-term constraint or a medium-term business strategy?

Why is the currency headwind massive when they are going to be spending a bunch on local production? Also, increased local production adds substantial depth to their library on the whole and gives Netflix an edge in every market. Currently, international distribution deals are a pain and add a lot of friction - Netflix being able to promote and monetize local content instantly across all their markets is a massive advantage that gives them significant clout on the production side. People that consume a lot of non-local content are more likely to be trendsetters that disproportionately impact the brand.

When do you predict that its growth will effectively stop?

Why isn't this simply a reflection of the valuation 2 years ago as opposed to now? Conversely, does the fact that the other tech stocks went up quite a bit in the last 2 years a bullish sign for those stocks?

And who could be next? There's been a bunch of those already and there should be a lot more - maybe this should be its own thread?

Can you link to some examples of these "strategy pieces" aimed at "product people or VCs in tech"?

Why is VC relevant? Netflix went public in 2002. VCs typically invest prior to IPO. I can't see any of the VCs that invested in Netflix prior to IPO listed as major institutional shareholders now...

B round: IVP (lead investor) and WSI.
C round: Foundation Capital, TCV, Comdisco Ventures, WS Investments
D round: Foundation Capital, TCV, Groupe Arnault
E round: Foundation Capital, TCV, IVP