Big Tech Feels The Chill – Investment Lessons After Netflix

Editorial Staff

25 April 2022

The plunge in the price of Nexflix stock last week, adding to woes that have taken its price down almost 64 per cent since the start of 2022, is a stark reminder of how investors must consider risk exposures.

This news service caught up late last week with Dr Richard Smith, known in the industry as "The Doctor of Uncertainty." He is the chief executive of the investing tool RiskSmith, and writes the Risk Rituals Newsletter, which offers investors advice on how to be more successful in a risk-based world. Dr Smith is also a regular commentator and his views have been aired on Business Insider, Forbes, CNN Business and other news platforms.

The dramatic collapse of Netflix appears to have caught some investors off-guard, but should they have been?
No, they should not have been caught off-guard. The same thing happened to FB recently. Big tech has been way overbid because of the herd mentality of investing and because of the easy money program of the Federal Reserve. NFLX has been delivering terrible reward to risk ratios since early 2022 with price declining and volatility rising. We saw a similar pattern in FB for three months prior to its big breakdown.

Does the situation raise wider implications for the health of Big Tech more generally?
Absolutely it does. As the cost of money increases, Big Tech’s future earnings become less attractive which will lead to more negative surprises and less forgiveness. Amazon looks like the next most vulnerable big tech company after FB and NFLX. AAPL looks the strongest.

What are the portfolio diversification and asset allocation lessons that wealth managers and private clients can take from all this?
Pay attention to Sharpe and/or Sortino ratios. When an asset fails to deliver rewards for risks, start trimming in the sails. Don’t succumb to anchoring bias. Just because NFLX was $690 in October 2021, doesn’t mean that it’s a bargain at $350 in April 2022. Increasing volatility has a cost. Pay attention to it.

Who in particular needs to heed the lessons of the sell-off? Are risk management systems fit for purpose in this industry?”
Everyone needs to heed the lessons of this sell-off in the likes of FB and NFLX. Wiping out $50 billion of shareholder value in 12 hours should not be possible but it’s happening more and more regularly this year. Something is broken and everyone needs to be on high alert. Risk management systems are extremely useful, but they don’t allow you to keep your head in the sand. It’s a time when all investors have to be chopping wood and carrying water.