Key characteristics of the current selloff are that investors are lumping all growth stocks together while assuming long-term inflation and structurally higher rates. But a broader prediction is that technology investment cycles are likely to speed up on the back of rising innovation, writes Brad Slingerlend in an essay on finews.first.
This article is published on finews.first, a forum for authors specializing in economic and financial topics.
In about four years through October 2021, Netflix’s stock surged more than fourfold as its global subscriber base more than doubled. Over the next six months, it gave back all those gains, returning to levels last seen in late 2017.
The pullback culminated in a 35 percent slump on April 20, a day after Netflix forecast a decline of 2 million subscribers in the three months through June and said it lost 200,000 customers in the first quarter, the first drop in a decade (notably, the only region where it added subs was Asia).
«We require a high degree of predictability»
Also April 20, Pershing Square Capital Management announced it sold its stake in the company, three months after disclosing it to investors, for a reported $400 million loss. «We require a high degree of predictability in the businesses in which we invest due to the highly concentrated nature of our portfolio,» Pershing Square Founder and Chief Executive Officer Bill Ackman said in a release. «The dispersion of outcomes [for Netflix] has widened to a sufficiently large extent that it is challenging for the company to meet our requirements for a core holding.»
Ackman's «We require a high degree of predictability» doesn’t seem to gel with allocating almost 6 percent of assets to a company that you acknowledge has a wider range of possible future outcomes. Netflix‘s growth has been curtailed by the launch of streaming services by traditional linear TV providers, along with mega-caps such as Apple, Google, Amazon, and Disney.
«The market has a particularly hard time finding equilibrium in times of heightened uncertainty»
This is not a criticism of any one style of investing, as every investor has their own risk analysis and portfolio management parameters. Ours recognizes and accepts the unpredictability of the world so that we strive to eliminate any reliance on hoping that a series of narrow predictions turn out to be accurate. Not making predictions can be an uncomfortable behavior for many investors, but it is increasingly necessary as the digital transformation of the economy causes the pace of change to accelerate which, in turn, creates an even more unpredictable world.
Disciplined assessment of potential future outcomes is especially important during times of upheaval. The market has a particularly hard time finding equilibrium in times of heightened uncertainty, which today is principally based on rising concern about global conflict, supply chain snarls, and the probability of significant rate hikes aimed at taming inflation. This combination of concerns has led investors to buy into the narrative that companies need to be currently profitable to be good long-term growth investments.
«Innovation has always been a powerful deflationary engine of growth»
Key characteristics of the current selloff are that investors are lumping all growth stocks together while assuming long-term inflation and structurally higher rates. That’s one possible outcome.
But a broader prediction is that technology investment cycles are likely to speed up on the back of rising innovation, accelerating our adoption of new technologies, which may drive down rates and inflation, since innovation has always been a powerful deflationary engine of growth.
Brad Slingerlend co-founded NZS Capital in 2019 with Brinton Johns. Before joining NZS Capital, he worked at Janus Henderson Investors. He began his investment career in 1998. He has a BA in Economics and Astrophysics. He is a CFA charterholder.
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