Consider it a warning shot across the bow of Silicon Valley, the opening salvo in a potentially brutal antitrust war. The head of the Department of Justice said in a public speech yesterday that low prices and free services would not shield “monopolists” from scrutiny. “There are only one or two significant players in important digital spaces, including internet search, social networks, mobile and desktop operating systems, and electronic book sales … This is true in certain input markets as well. For example, just two firms take in the lion’s share of online ad spending”, said the head of the DOJ, Makan Delrahim. He continued “Like today’s tech giants, Standard Oil was pioneering and generated a number of important patents. Scholars have noted, however, that Standard Oil’s innovation slowed as it became an entrenched monopolist”. Delrahim also listed specific behaviors which would spark investigation, including bundling products together.
FINSUM: The government is poised to launch a large and multi-fronted war on big tech. How long this will take, or how it will play out in markets is anyone’s guess, but it is hard to find any positives as far as big tech company share prices are concerned.
Markets sold off in a big way when new of the government’s antitrust push against the FANGS came out. The stocks lost $130 bn of value. However, the reaction may be overblown, with each stock needing to be assessed on its own merits, as the antitrust picture would look different for each of them. A managing partner at Andreesen Horowitz, one of Silicon Valley’s top venture capital firms, makes an interesting point, saying “The big challenge with these antitrust things is, it’s not obvious what the consumer harm is today”.
FINSUM: We think that point is very salient, as given the fact that it is hard to assert how consumers are being harmed, we expect the ultimate output of these investigations may be relatively light touch (such as a GDPR-like regulation).
The FANGs have gotten a lot of market pressure lately, both in the form of sell-offs, but also from analysts, who say tech companies will be among the worst hit by tariffs. However, one fund, Light Street Capital, which has made great returns betting on new technology companies, thinks Netflix has a lot of room to run. They reason they like Netflix is that the company has intentionally made its product very cheap in order to grow its subscriber base. They think there is a lot of room for Netflix to raise prices without alienating customers. Consumers have gotten used to paying $100 a month for cable, but are currently only paying $9-$12 per month for Netflix.
FINSUM: Netflix has a lot of room to expand margins. Think about the effect to earnings if it raised prices to a still very tolerable $14.99 per month.
Netflix has been hammered recently by news that Disney is launching its own streaming service. The stock saw a major selloff on Friday (4%) because of the threat the Disney move theoretically poses to Netflix’s model. However, the fears seem overblown, providing a buying opportunity of Netflix. Analyst Scott Devitt from Stifel explains, “We see little risk to Netflix growth plans and pricing power against this new offering given Netflix’s most popular price point should remain lower than the Disney bundle while Netflix is on track to materially outspend Disney on content”.
FINSUM: Netflix seems likely to remain both cheaper and offer more content for the foreseeable future, so the fears do seem overdone to us.
Netflix saw a big selloff on the report of its earnings yesterday. However, don’t be fooled by the market’s reaction, the data was strong. Netflix’s big narrative right now is about whether it can expand internationally. Guess what, international subscriber numbers from yesterday’s earnings blew away expectations, with 7.3m overseas subscribers versus expectations of 6.13m. US subscribers saw a slight miss, which likely caused the price decline.
FINSUM: Netflix does seem like a good buy to us. They are raising prices and growing strongly. We don’t think the price hike will deter many customers.