Stocktake: ‘Merciless’ markets hammer Netflix and other growth stocks

Prices had lost all touch with reality, but some, such as Zoom, may have over-corrected

"When Value disappoints, markets are mad," fund giant GMO observed recently. "When Growth disappoints, they are merciless." Netflix shareholders learned that lately, with the stock losing almost 40 per cent of its value in January.

Netflix’s crime? Slowing subscriber growth. Easily beating earnings estimates and matching revenue expectations couldn’t save the stock from sinking.

Ritholtz Wealth Management's Michael Batnick notes Netflix shares are now at mid-2018 levels, even though it has 70 per cent more subscribers, twice as much revenue and five times as much income.

When you’re priced for perfection, nothing less will do. In 2018, Netflix traded at 14.6 times sales and 276 times earnings. Today, it trades on 6.3 times sales and 36 times earnings.

The same story is playing out all over the place, says Batnick. Shopify’s revenues are soaring, but the stock has halved since November. Calling a bottom looks brave, considering the company still has a market capitalisation of $110 billion and a price/sales ratio of 27.

The same could be said of Tesla, which still boasts a stratospheric valuation despite losing a quarter of its value.

Of course, some former market darlings may well be oversold. Zoom shares, for example, have returned to March 2020 levels – some statistic, given Zoom’s long-term future looks much brighter than it did before the pandemic.

Still, growth stocks were until recently priced at incredibly unrealistic levels. Little wonder they have been, as GMO put it, “mercilessly repriced”.