How to Avoid a Netflix-Like Crash in Your Tech Stocks

The FAANG fans had another embarrassing week.

Last quarter, it was Facebook that let them down. This quarter, it was Netflix.

The stock fell 35% in a single day. It's down by over 67% from November 2021.

The Covid boost to subscriber base has worn off. For the first time in a decade, its subscriber base has declined. The management has guided for an even larger decrease.

Viewing content on these over the top (OTT) platforms has been on the rise. It's just that the competition has heated up. And Netflix seems to be failing to keep up pace.

One of the main concerns the management highlighted was the sharing of passwords. People are viewing Netflix but not paying for it.

It's disappointing the management didn't see this coming. The password I use for Netflix has been shared multiple times. It's rather a norm these days.

Yet the whole bunch of smart analysts and big fundmanagers did not factor this risk. That's very surprising.

Bill Ackman deserves special mention. He took a US$400 m hit on a US$ 1.1 bn bet he made just 3 months ago.

This is what he said...

• The opportunity to acquire Netflix at an attractive valuation emerged when investors reacted negatively to the recent quarter's subscriber growth and management's short-term guidance.

Here's his statement after exiting the stock...

We have lost confidence in our ability to predict future prospects.

This awareness and honesty last quarter could have saved millions for the fund and those who invested in it.

Now there are lessons to be learnt from this.

First, don't blindly follow big investors.

The media may lure you with stories of what Mr Jhunjhunwala is buying, or how Ashish Kacholia rejigged his portfolio last quarter.

Use can that as a starting point if you like. But build your own conviction. Do your own due diligence before buying the stock.

Even big investors are human and fallible. They will remain billionaires despite losing millions, given the corpus and allocations they have. Betting on them blindly could cost you fortune, not just from losses, but lost opportunities as well.

In the end, it looks like most investors, big or small, are chasing hype and rising stock prices. Both, value and growth considerations have gone out of the 'Buy' decision making.

This is truer for the tech companies and hyped sectors. It has led to emergence to BAAP (Buy at any price) investors.

I'm not writing off these businesses. Nor I'm against new age businesses. In fact, I believe these businesses have brought with them a huge disruption. They have shaken the status quo. They offer huge potential for wealth creation.

It's just that the so-called disruptors are quite vulnerable to disruption themselves. The industry itself may grow, but they competition could outdo the 'market leaders.'

Paytm is a case in point. Despite the booming Fintech industry in India, the company has failed to turn around. Amid rising competition, its challenges seem bigger than the growth opportunities.

So how can you participate in the tech boom without getting slaughtered like Netflix investors did?

The real opportunities, especially when it comes to tech stocks, may not be in the front runners, but in the ecosystem supporting them.

That's because while they may be highly 'visible', their growth sustainability is under a cloud. It doesn't help that a lot of them, at least in India, are loss making. Thus, getting a sense of their true valuations is a challenge.

For instance, if you are bullish on the future of food delivery tech market, it might make sense to invest in a listed player in the ecosystem that serves the foodtech industry (Zomato, Swiggy and the rest), rather than making a concentrated bet on Zomato.

Similarly, if you are bullish on the rise of electric vehicles, it would make a lot more sense to invest in auto ancillary players supplying critical parts to multiple EV makers, rather than betting on the auto OEM rolling out new models of 2-wheeler EVs and competing with the likes of Ola Electric.

Or if you believe in the climate tech and green energy, consider listed companies taking stakes in greentech startups, rather than the ones making huge investments in the space.

For platform businesses, dig a bit deeper. You will come across listed businesses ensuring every online order you place, or transaction you make, goes through seamlessly.

In short, there is huge wealth to be made in new age businesses and disruptive trends. You just need to look in the right places. You are unlikely to find them in mainstream financial media. They can't get over the visible players.

Last but not the least, if you don't understand a business or do not have enough visibility, stay away. Do not wait for the stock price correction to learn that lesson the hard way like Mr. Ackman.

Investing history is a proof that some of the most legendary investors have made huge wealth, and retained it, from the humility to accept this limitation, and the willingness to let go of an opportunity they do not understand, rather than act on fear of missing out (FOMO).

Warm regards,


Richa Agarwal
Editor and Research Analyst, Hidden Treasure