The Squid & the Whale, Revisited
Amazon and Netflix (and Tesla), oh my!
A year ago, I was thinking about the broader tech landscape, and which companies were the most compelling at the time. I spent much of my career as a reporter covering Apple. And Google (Alphabet) happens to be the LP in the fund where I’m a partner, GV. Both were and are great companies. Truly great in many ways. But, in my view, they were no longer the most compelling. To me, that mantle was taken by two other companies: Amazon and Netflix. And so I wrote a set of posts, one about each, which I dubbed “The Squid & the Whale”. I thought a year later might be a good time to look back on those.
The Whale
A year ago, Amazon’s stock had just eclipsed $900/share for the first time. It was valued around $400 billion. Today, the company’s stock price is north of $1,500/share. The company is valued north of $700 billion. Again, just one year later. Anyway you slice it, this is an astounding run and creation of value. But it’s especially impressive given how big Amazon already was at the time. As noted a year ago:
Amazon, for my money, is the most interesting company operating today. Even valued north of $400 billion, it feels cheap. Because they’re not only doing so much, they’re doing so much well. They’re out-executing pretty much everyone, and they’re doing it at incredible scale. A trillion dollar valuation doesn’t seem absolutely insane. Which is insane.
Amazon is now the third most highly valued company listed on the U.S. stock markets. It’s just ahead of Microsoft and just behind Alphabet, which it will undoubtedly surpass soon. Apple is still about $100 billion away, but I continue to believe that Amazon will beat Apple to the $1 trillion mark.
It will be a close call, largely because our current President seems to want to destroy Amazon and will continue to use Twitter as his weapon of choice in this, which spooks investors. But Jeff Bezos is (smartly) playing the long game and not wading into that war (except, perhaps, maybe in subtle, amusing ways). And we’ll see how Apple’s next versions of the iPhone sell. “Bigger” greatly helped Apple once, and the indications are that there will be a larger phone in the style of the (fantastic) iPhone X coming later this year. If it’s another blockbuster, Apple could beat Amazon to $1 trillion.
But stepping back, I believe it’s inevitable at this point that Amazon passes Apple to become the most valuable company (just as it was that Bezos would surpass Bill Gates as the wealthiest person). It’s just a matter of when. And given the past year, I’d bet on sooner rather than later.
100 million Prime members (finally, we get a number!). Prime Video back on track (can’t wait for the Jack Ryan series). Prime Music doing better than many expected (thanks, Alexa). The Echo devices themselves are owning the market (thanks, Siri). Whole Foods. Bookstores. AWS. The list goes on and on — and will only continue to expand.
Okay, but Amazon was a pretty easy call. Netflix, less so.
The Squid
For at least the past decade, folks have been waiting for Netflix to implode under the weight of their debt. But that isn’t happening because the company is and has been using that money wisely. The expansion continues, even when it seems like it can’t. As I wrote last year:
Netflix is running the Hollywood playbook how you would run it if you were a company (largely) built in the 21st century, not the 20th. The data. The checks. The freedom. Hollywood has no answer for this. None. The only one who might… more on that later.
On the flipside, when you talk to people — smart people — many folks are still unconvinced that Netflix itself isn’t a giant… wait for it… house of cards (lower case). That is, they’re paying so much for content without seeing huge returns to their bottom line. A lot of this is paid for by debt. Can this continue on forever?
A year ago, Netflix was trading around $140/share. Their market cap was $60 billion. Today, Netflix is trading around $330/share. Their market cap is north of $140 billion. Yes, the company has more than doubled their market cap in the past year. Even in an overall bull market, that’s incredible growth. Even more incredible for a company their size.
With this rise, Netflix has cracked the top ten most valuable companies on the NASDAQ, just behind Pepsi — and, notably, Comcast (with which Netflix just struck an interesting deal to undoubtedly continue the expansion).
What’s most remarkable about Netflix is that they’re doing this on their own in the face of immense competition. Beyond the Comcasts of the world, all the major tech players — all the folks listed above, including Amazon — have entered their arena in a major way. And they don’t need debt to fuel their content plans. Hell, each has enough cash on hand to buy all of Netflix, outright. And yet, Netflix not only endures, they continue to grow.
The reason why is clear: as a focused player in this space, Netflix is just smarter than their competitors who are doing a million different things. Amazon, Google, and soon Apple are all leveraging content to augment their other (real) businesses. Content is Netflix’s business.
That’s why the only truly scary competitor to Netflix at this point may be the only other truly impressive entity that knows this game: Disney.
We’re still a ways away from Disney fully entering this world, Netflix-style (though ESPN+ did just roll out). But under the direction of Bob Iger, Disney has run laps around their competition in the content arena. And, in the background, they made some smart bets on the technology side. We’ll see how those pay off soon enough.
But even with increasing competition, the thing you can bet on is Netflix staying a step ahead. They’re both smart and fearless when it comes to execution. Looking back on the cadence of DVDs-by-mail to streaming to original content, I’d guess that Netflix is already both thinking about and working on what’s next.
Okay but lest this post be all about being right, I did enter a wild card into the mix a year ago as well: Tesla.
The Leviathan
While I hedged quite a bit in noting that Tesla was a company to watch over a much larger time horizon, there’s no question that not only has Tesla not been a juggernaut over the past year, their stock price, after a nice surge last summer, is now actually below where it was a year ago. We all know why that is: Tesla has not been able to execute on their core business: making cars.
Seemingly everyone wants a Model 3, but very few people can actually get one right now. Nor will they be able to for some time.
As a result, many, many, many folks are now worried that the company will also collapse under the weight of their debt. I’m far from an expert in this world, but gut instinct tells me there is approximately a zero percent chance of this happening. Time and time again, Elon Musk pulls the rabbit out of the hat. And it’s back off to the races. I know you shouldn’t rely on rabbits, nor hats. But it is what it is.
We’ll see. The focus, in my mind, should remain on a much longer time horizon and much larger scopes with Tesla. Such things bring more risk — and potentially more reward. So let’s revisit this one in say, five years, shall we?
Disclosure: Just to be clear, I don’t actually own any of these stocks (at least not directly). I did tell my wife (before she was my wife) to buy Tesla stock a little over five years ago, when she was asking me to pick an individual stock to buy. That was smart. I’m apparently less smart. I should probably have put my money where my mouth was, but buying public stocks isn’t my job. In other words, don’t consider any of this to be investment advice by a professional.
