How can Netflix be worth nearly as much as Disney?

Five years ago, Disney was worth nearly ten times as much as Netflix, and over this time, Disney’s earnings have been 35 times larger than Netflix. Yet the gap in company size has all but disappeared.

How is this possible?

Over the last five years, Netflix has seen its revenue growth surge six times faster than Disney. Media networks, which represents 42% of Disney’s revenue and 46% of its operating income, fell 1% from 2016 to 2017. Netflix’s best days are ahead of it, cable’s best days are behind it. Does this mean that Disney ought to be trading at 14x forward earnings while Netflix trades at 95x? I don’t know, but investors have always paid a premium for growth, even if it hasn’t yet translated to the bottom line.

How can IBM have earned $77.7 billion since 2012 while its investors earned -3%?

It’s had declining revenue growth in 20 of the last 22 quarters, that’s how.

How can a company make a quarter of a trillion dollars and see its market cap decline by almost twice that amount?

General Electric has earned $230 billion since 2000, and yet investors have earned -50% over the same time.  GE earned a ton of money since the turn of the century, but it’s averaged just 1% revenue growth rate over this time. Its free-cash-flow has been negative in 7 of the last 10 quarters. Just because a business earned a lot of money, doesn’t mean that it’s investors will.

How can earnings get cut in half while the market gains nearly 50%?

The market is all about discounting and expectations. It always has been and it always will be. In 1908, Dow earnings were cut in half, but that had been discounted in the previous year’s 38% decline. From 101 Years on Wall Street, “The year 1908 was much like 1975 would be. A stock market collapse in the preceding year had discounted all of the bad news and shares would mount an exceptional rebound, ignoring greatly depressed industrial conditions.”

How can a miracle of modern medicin cause a company’s stock to crash?

In Jason Zweig’s Your Money & Your Brain, he tells a story about Celera Genomics, a company that was involved in  human genome sequencing. The stock went from $17 in September 1999 to $244  in early 2000. And then…

On June 26, 2000, in a grandiose press conference held at the White House…Celera’s chief scientist J. Craig Venter announced what he called ‘an historic point in the 100,000-year record of humanity.’ And how did Celera’s stock react to the official word that the company had completed cracking the human genetic code? It tanked, dropping 10.2% that day and another 12.7% the next day. Nothing had happened to change the company’s fortunes for the worse. Quite the contrary: Celera had achieved nothing short of a scientific miracle. So why did the stock crash? The likeliest explanation is simply that the fires of anticipation are so easily quenched by the cold water of reality.

How can 97% revenue growth be bad for a stock?

When it’s not good enough. Again, from Jason Zweig.

On January 31, 2006, Google Inc. announced its financial results for the fourth quarter of 2005: revenues up 97%, net profit up 82%. It’s hard to imagine how such phenomenal growth could be bad news. But Wall Street’s analysts had expected Google to do even better….Google’s stock fell 16% in a matter of seconds, and the market in the shares had to be officially halted. When trading resumed, Google, whose stock had been at $432.66 just minutes earlier, was hammered down to $366…Google earned about $65 million less than Wall Street had expected, and in response Wall Street bashed $20.3 billion off Google’s market value. 

Investors are forward looking, which is why it doesn’t matter how much IBM earned over the last five years. What matters for that stock is that its future ain’t what it used to be. I don’t understand how Netflix is worth as much as Disney, but I stopped obsessing over the how after the seventh time I tried shorting Amazon.


Your Money & Your Brain

101 Years on Wall Street