Netflix or Tesla?
If you draw a chart starting a year ago, you’ll see Tesla and Netflix had both returned about 35% by mid-January. Since then, however, their performances have diverged spectacularly. After the latest earnings releases, Netflix is now up 62% over the 12 months and Tesla is up just 10%. It’s like the two share price lines had a terrible fight and aren’t talking to each other any more, with one shooting up to the moon and the other flatlining.
The thing is, Netflix and Tesla aren’t competitors. There’s no logical reason to lump them together, but markets aren’t logical. Both are among the technology giants that have defined the past decade on the markets. Netflix was part of the previously popular FAANG group but didn’t make it into the “magnificent seven”. In contrast, Tesla has moved from relative obscurity into the spotlight over the past few years.
We need to look over a longer period to understand why market enthusiasm for Netflix waned. Over five years, Netflix has returned “only” 68%
— solid in dollars but nothing incredible. In contrast, Tesla is up a spectacular 780%. Yet Tesla is dwarfed by Nvidia, which has gained nearly 1,600% over that period as AI exploded. Netflix is the laggard among the peer group, with even Amazon and its free cash flow furnace achieving better returns.
This relative underperformance is why Netflix lost its status as one of the world’s most exciting growth stocks. Do the recent earnings change that? To figure that out, we need to consider what the next few years could look like for Netflix vs the likes of Tesla.
The challenge for Netflix in the past few years has been the fight for dominance in the streaming game. The economics are difficult here, with content and technology owners mixing their drinks and trying to figure out the right competitive cocktail. The winner has been the consumer. For the price of what people used to pay for a premium DStv package, you can have several subscriptions to services such as Netflix, Disney+ and Amazon Prime Video. There’s a huge amount of ondemand content and there’s stuff that you can’t find anywhere else.
The studios wanted to own their distribution and the distributors wanted to become studios. The costs of this are enormous. It took the market a while to figure out just how tough this game is. At the height of growth stock mania during the pandemic, Netflix was trading on a revenue multiple of 11.3. By the time reality set in during 2022, that multiple had dropped to
2.4. When you consider that this is one of the most followed stocks in the world, it’s amazing how quickly the efficient market hypothesis falls over.
Over the past year, that multiple has averaged 5.5. It has spiked to 7.4 with the latest share price move, putting Netflix in dangerous territory again. The market has clearly seen something that it likes.
There are two major reasons to feel good about Netflix at the moment. The first is that the streaming war is shaking out the field, with Netflix emerging as the overall winner. This drives better unit economics, as is typical in a winner-takes-most industry. The second is that Netflix has learnt from its sports-adjacent programming (such as Drive to Survive, Full Swing and others) and the sheer value of sport. With 260-million subscribers, it has a bigenough audience to go after sports rights. It’s starting with WWE Raw and will take it from there. Though the impact on profitability remains to be seen, it doesn’t take any imagination to see the value of popular sports being available on Netflix. There’s a growth story here.
Rocky road
But what of Tesla and the outlook in that industry? The electric vehicle market is arguably where streaming was a few years ago, with competition going through the roof. This means pricing pressure, which is why Tesla’s automotive revenue was up just 1% in the fourth quarter despite deliveries being up 20%. Operating margin has come under great pressure as a result, making Tesla look more like any other car company and less like a technology company.
If we learnt anything from Netflix’s experience in a bright red ocean of competition, it’s that the next couple of years could be rocky for the Tesla share price. If I had to pick one of the two to buy today for the medium term, it would be Netflix.