A couple of years ago, when the pandemic started, everybody was crazy about investing in Netflix. Being locked down and unable to do other forms of entertainment outside your home, almost everybody resorted to subscribing to Netflix. Naturally, their stock price soared, and people hyped up the Netflix stocks like how they did with Bitcoin when that was in a bubble. Fast forward to the year 2022, Netflix's stock price has done nothing but fall, and it's now sitting at -64% returns Year-To-Date.
So what happened? And as is there an investment opportunity here?
What is causing the crash?
Recently, many people have shown concerns about the deteriorating quality of the shows on Netflix. However, that doesn't seem to be the real issue here. When you look at other streaming services like Disney, Roku, FuboTV, and CuriosityStream, they are all crashing down. This isn't just about Netflix anymore, but the entire streaming service industry is crashing. This usually means a much more significant macroeconomic factor at play: inflation. Below are some of the major contributing factors to rising inflation.
- Central banks printed insane amounts of money during the lockdowns to stimulate the halted economy. More money injected into the economy meant inflated prices of everything.
- Halted business operations began to choke the supply chain (ex., logs for building materials), and prices started creeping up due to a lack of supplies.
- The Russian-Ukraine war further contributed to choking the energy supplies and further drove the prices of everything up even more.
With so much inflation happening, people don't have the luxury of spending money on unnecessary things. If you are having difficulty putting food on the table, you will unsubscribe from all the streaming platforms.
How should you invest in this opportunity?
My investing philosophy of cash income first approach shines during the economic recession. When the investors panic and pull their money out of the stock market in anticipation of economic recession, growth stocks are negatively impacted the most. However, cash-generating investments like dividends or income funds continue to perform relatively the same because these companies have a healthy cash balance. They generally do because they obviously need to pay out cash in the form of dividends to the shareholders. That is, these companies can afford to withstand the difficult economic times better.
With the cash that's being generated, you can now be aggressive about buying the crashed streaming service companies monthly. If there isn't a thematic ETF of streaming service companies, I tend to buy the top 7-10 companies and spread my investments equally across them. You would continue to buy up throughout the months of recession (which only lasts about 6 months to 2 years). Continue to follow the news and if the economy is recovered to get out of the recession, stop the buying. Simply hold for years to ride the upward trends in the years that follow.
Suppose, for some reason, you cannot buy the stocks during the bad economic times. In that case, (perhaps you've recently been hurt by the falling stock prices and can't let go), you are doing something wrong in your investments, and it's time to consider changing your investing strategy seriously. Check out my guide for dealing with economic cycles.