Netflix's future - and the future of many other top tech companies - are in doubt. Photo / 123RF
Netflix's future - and the future of many other top tech companies - are in doubt. Photo / 123RF
The stock price of streaming service Netflix has crashed as it admitted it lost subscribers in its biggest market.
Questions are being raised about the future of the $136 billion US technology darling. It expects to have cash flow of negative $3.5 billion this year. But it is valued so highly because investors think it is still in its growth phase. If the growth is slowing down or stops, what is its future?
Netflix's embarrassing customer loss in the US came after it tried hiking prices. It added 2.7 million new subscribers in the rest of the world, but that was fewer than expected. The stock market heard that news and hated it, as the next graph shows.
Netflix's stock price has plunged. Photo / Supplied
Questions about the future of Netflix go beyond just one company to all the big tech stocks that are losing lots of money as they grow — Uber, Tesla, Spotify, scooter-sharing companies like Bird and many more.
Many investors are flabbergasted that money-losing companies can be worth so much on the stock market. Tesla is worth $30 billion by stock market valuation despite losing money in 20 of the last 23 quarters it has been alive. (The $470 million profits it has made in those three profitmaking quarters are smaller than the losses — $700 million in the last quarter alone.) This is unusual. After all, the reason to own a company is that ownership gives you a right to a share in the profits — what they call a dividend.
Historically, companies that lost that much money would go broke fast. This period in time is different. We are in a world of low-interest rates where investors are used to low returns. They are very willing to absorb losses for a long time. Buying stock in a company that pays no dividends and has massive losses might seem like a better option than buying a 10-year government bond with a negative interest rate like you get if you lend money to the French Government. That's right, investors are paying Macron to hold their money for 10 years.
Can Netflix deliver profits if investors stop being patient? Photo / 123RF
Investors are patient, and that's the whole point of low-interest rates. We intend for companies to borrow and try things they wouldn't be able to do in a more normal time. This brings more companies into existence — ones like Netflix and Uber — and allows them to get really big. They employ people and the economy grows, and that economic growth was the goal of the monetary policy authorities all along.
These companies usually explain their ongoing losses by pointing out they are still growing. And to some extent it's true. Netflix is investing in making lots of new TV shows now, hoping it will have a mega-hit that turns into a cash cow for years to come.
But under the surface, there's a question. Will these companies ever get out of the growth phase? Will they be able to survive if they ever need to stand on their own two feet? Like if a recession comes or if interest rates rise? If investors stop being patient, will these companies be able to deliver profits?
Uber is another company that is yet to be profitable. Photo / 123RF
Your business can have lots of customers if you allow it to run it at a loss. Netflix is cheap each month, and that's because it is not worrying about profit margins (yet). In the US, when Netflix started thinking about profit and put the monthly price up, that in turn caused people to start cancelling. That made people realise Netflix customers are price sensitive.
Netflix's bad quarter helps answer the question of what happens to tech companies if interest rates go up — and it's not good news. It has me wondering — will we ever able to raise rates without killing all these new consumer technology companies?
This is part of what is trapping us in this ongoing cycle of low-interest rates — so many of the companies that have been formed in this period of low-interest rates are never going to become successful. They're good ideas, not good businesses.
Australian company AfterPay may be another example. How much value is really added by its pay-later model?
DISNEY PLUS NETFLIX = TROUBLE
The trouble for Netflix is bigger than just being unable to raise prices without losing customers. It has a major competition coming.
Disney is now entering the streaming market with a new service — just like Netflix — except packed with its own shows and movies. Disney now owns Star Wars, the Marvel superhero movies and also Pixar, so its offering could be quite good. It is charging $7 a month in the US.
That low monthly price hints at another problem for Netflix. It showed that a streaming service is a viable business. And now, just when Netflix is ready to try to start turning a profit, interest rates are falling again, and competitors are coming. Those competitors are backed by their own patient investors. It could be years before we find out which of these companies is strong enough to stand on their own.
