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Netflix: A study in the application of the Human Factor

Can the streaming service deliver the growth implied by its stock price?

Netflix over the past few years has become part of every avid TV viewer’s life. Many of us are subscribers and we find that the content is just so much better than our previous satellite TV content provider. In addition, anything on Netflix is available on demand when we want it, no more waiting for our favourite series’ next episode to be aired in accordance with a prescribed schedule.

With this convenience arrived a new phenomenon known as “binge-watching” where some of us would do nothing on a weekend but binge-watch the whole season of a series. I have even heard of someone taking leave to watch all the seasons of a series!

Netflix then developed from a content provider into a content creator.

We all realise that Netflix as a business is very successful and is part of what we as stock market investors refer to as the “FAANGS” (Facebook, Apple, Amazon, Netflix, and Google) stocks or even “FANMAGS” (Facebook, Apple, Netflix, Microsoft, Amazon, and Google) shares.

Considering all the above, I was very interested to read our New York-based associates, New Age Alpha’s report on Netflix that they recently published on their LinkedIn page.

New Age Alpha LLC is an asset management and financial technology company.

In the article, New Age Alpha reported that prior to the pandemic Netflix was thought to have a grim future since competition for streaming services was accelerating, in particular, Disney was launching its own streaming service and reclaiming some of the content which had driven audiences to Netflix.

Then Covid-19 arrived, coincidentally on March 20 2020, Netflix launched the true-crime documentary Tiger King. A world suddenly housebound brought in a whole new reason for Netflix to exist! During the hard lockdowns faced in many economies around the world, life suddenly became about work from home and watching streamed entertainment.

As the world has come out of hard lockdowns, where the movement of people has slowly been easing towards some form of normality, what is to become of Netflix’s future? Now, we know that the future is uncertain and 2020 is certainly testimony that the future cannot be predicted, but New Age Alpha has a way of displaying through their “Human Factor Score” (or H-Factor for short) the probability of a listed company not being able to justify the growth implied in its share price.

So, what is the Human Factor? 

The Human Factor measures the probability that a company will fail to deliver the growth implied by the stock price. This may be caused by investors interpreting vague and ambiguous information in a systematically incorrect way. In Netflix’s case, human behaviour may have driven its price too low prior to the pandemic, too high during the pandemic, or priced both periods incorrectly.

What was the human behaviour’s impact on the Netflix share price? 

New Age Alpha reports that: “In June of 2019, Netflix, Inc. (NFLX) decreased to approximately $265 a share, while in January of 2021 it peaked at approximately $565. The exact reasons for this fall and rise, however, remain vague and ambiguous.

“There are strong arguments both for and against Netflix’s continued success.

“On the one hand, as one of the so-called “FANMAGS”, Netflix is often grouped together with some of the most prestigious members at the top of S&P. On sheer momentum alone, such association might keep Netflix thriving.

“On the other hand, Netflix’s recent crackdown on password sharing not only brought mockery but also concern that such actions could be a sign of earnings trouble in the future. Why else would they feel the need to suddenly enact such measures? Each consideration is important but weighing their exact effects on the stock price remains elusive.”

New Age Alpha focuses only on the information that is known (neither the vague nor the ambiguous). As of April 1, 2021, based upon Netflix’s stock price and the known financial information (financial statements), New Age Alpha believes there is a 21.2% chance that Netflix will fail to deliver the growth implied by its stock price.

With a Human Factor of approximately 21.2%, New Age Alpha believe that Netflix appears likely to deliver the growth implied by its stock price. Remember, the lower the Human Factor the more likely vague and ambiguous information has NOT been priced into the stock.

Netflix’s position in its industry 

As of April 1, 2021, Netflix had a better Human Factor score than many of its peers in the communication services sector.

While Netflix had a score of 21.2%, the sector had a median Human Factor of 50.0%. Of the 22 companies in the sector in the S&P 500 Index, Netflix is third overall according to the Human Factor.

To explore the Human Factor for the S&P 500® and over 5,300 global stocks, ETFs and indices, please visit New Age Alpha’s H-Factor System. New Age Alpha allows people visiting their website to use their Human Factor for free, you will need to go through a short registration process, but it is free!

We at Global & Local have a Service Level Agreement (SLA) with New Age Alpha and we are through this SLA permitted to use and promote New Age Alpha’s Human Factor methodology and the “Avoid the Losers” strategy in South Africa. Global & Local uses the Human Factor Score and the “Avoid the Losers” strategy to manage the assets in our four South African Collective Investment Schemes which have been approved by the Financial Services Conduct Authority. For more information see our website.

Should anybody wish to read New Age Alpha’s report on Netflix as published by them please contact Global & Local Asset Management on info@glamasset.co.za.

Disclaimers 

The information contained in this article cannot be construed as investment advice. Should an investor wish to invest in any investment products mentioned in this article it is recommended that the investor discusses this possible investment with a licensed financial services provider that is able to offer advice on the investment product in question through the required approval provided by the South African Financial Sector Conduct Authority. 

Past performance is not indicative of future results. Current and future results may be lower or higher than those shown. An investor utilizing the Human Factor may experience a loss. No client or prospective client should assume that any information presented in this article serves as the receipt of, or a substitute for, personalized individual advice from New Age Alpha, Global & Local or any other investment professional.

Global & Local Asset Management is a juristic representative of Global & Local Investment Advisors, FSP license 43286. 

All New Age Alpha trademarks are owned by New Age Alpha LLC. Global & Local has a Service Level Agreement with New Age Alpha LLC to utilise New Age Alpha materials and trademarks in South Africa.

ADVISOR PROFILE

Mauro Forlin

Global & Local Asset Management

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