The entire stock market feels like its in a bubble.
Netflix stock gained more than 25% in the past one month. Their free cash flow (FCF) has been negative every single quarter and will be for many quarters to come. Stocks trade based on discounted cash flow(DCF). Netflix however produces no material return for investors and still majority of the analysts keep putting higher and higher price targets, its like they are collectively pushing a hidden agenda. It's as if there is this new way of valuing companies that is not based on DCF.
A lot of sophisticated financial people share your thinking.
The problem is there's no growth to be found anywhere. People are cheering for 3% GDP growth in the US. Interest rates are at all-time historical lows, meaning discount rates are lower than they've ever been.
These macro trends have added up to an environment where people are willing to pay staggering premiums for even a remote shot at growth. It's affecting every asset class from real estate to public market equity to early-stage startups to commodities, and you aren't the only one who's worried about it (I am).
To what degree does income inequality, consumer debt, and rapidly rising barriers of entry to high-income fields contribute slowing GDP growth? Is there research and evidence on the subject?
I'm just an engineer with basic financial survival skills... but blind intuition suggests fixing those problems is necessary for a sustainable growing economy.
"Trickle-down" theory and growing inequality drains economic activity since the "1%" invest their money instead of spending it. They profit when the public consumes, unless short-sighted over-exploitation by some industries strangle general consumer activity...
It sure looks like we're being strangled. Off the top of my head: urban rent, health care, high consumer debt and student debt reduce disposable income while automation, exporting jobs, poor retraining for adult laborers, and lower small-business access to capital due to banking mergers lower actual income. When businesses close, some of their ex-employees will switch to high-skill high-demand jobs... but most will increase the labor supply in less skilled industries because they urgently need money - putting downward pressure on wages and working conditions.
If I'm wrong, I'd love to learn why, and what other systemic conditions explain our economic stagnation.
Not trying to invalidate your larger argument, but it's worth noting that there is no such thing as "trickle-down theory"https://blogs.spectator.co.uk/2015/04/sorry-but-trickle-down....
Never was, never will be. It's a strawman through and through, originating in mockery, amounting to nothing more than "screw the poor" slogan that no self-interested economist could have endorsed. Its only purpose is to ridicule the perfectly valid – and hard – question of optimal tax policy that achieves long-term budget prificit without stifling development of businesses.
Hilariously enough, some less than savvy people with conservative inclinations have defended and adopted this strawman as if it was a legitimate model, but this has more to do with meme dynamics than with economic policies.
As for your larger argument, well, this is a just-so model. There are many different ones, in favour of different policies, of course. But, realistically speaking, constant growth of a developed economy was never possible. However well you reduce inequality or deal with automation-related job loss, there are limits to attainable market expansion. Stagnation or, at best, negligible growth are something we need to learn to face.
You cited an article that basically says 'Trickle down doesn't exist, plebs. But hey, trickle down totally works! Here's why!'. What he describes is the policies that people refer to when they say Trickle Down.
Not sure why your getting downvoted. The article largely tries to debunk TD exists because 'no recognised economist of any school of thought has ever had any such theory or made any such proposal'
TD has been referred plenty, not under than name. You'll find a bunch of economist views (positive and negative) under supply side theories which is often steeped in trickle down theory.
And then the article promotes TD under the logic; "the sequence of payments is directly the opposite of what is assumed by those who talk about a ‘trickle down’ theory. The workers must be paid first and then the profits flow upward later – if at all." based on a couple of examples and his loose theory without any real research.
There are plenty of proper studies to the contrary available with an easy google.
This isn't about the number of examples. It's plainly disingenious to say that "TD has been referred plenty, not under that name". Basically, in such way one demands the right to reduce supply side theories – or, in popular practice, to reduce every argument in favor of any taxation rate lower than proposed by the opponent – to a strawman of choice, as if the strawman was the original idea that's "covered up" or "dogwhistled" or whatever. Like this, in extreme:
A: We need to impose 100% tax on the top 10%, to achieve economic growth and lower inequality.
B: This isn't even wrong, this is asinine.
A: Oh, trickle-down much?
Why do this? Naturally, because genuinely debubunking the specific arguments against high tax rates is a lot harder than joking about the bourgeoise that promote TD because of their greed.
I think it's more that, when people sit down and debunk the arguments against high tax rates, the people who believe in supply side economics don't read them. Which in some cases is because they'd rather watch old cowboy movies. In others, it's because they simply don't care. It's an extreme case - but consider what happened to the last accademic economist who tried to use economic arguments against the external imposition of supply side. He was called Yanis Varofakis. They ignored him, the press called him a nut, then they just went ahead with the austerity package.
I'm not saying you're wrong. I understand where you're coming from. You raise good points. I think we need to add to this list one simple idea: regulation.
Housing costs are terrible. They're getting bad even in small towns like mine. There is no way that my house is worth 172k. For many, especially in California and states that followed their lead, housing cost are largely, not solely, due to regulation on new house starts. Environmental impact and associated costs make a new housing community in California on average 1 million dollars more expensive. For many, they don't even put shovel to sod.
Health in the US has a lot of this too. Governmental regulations and the AMA drive up the cost of doctors. All of this is well documented. Interestingly, the free market is coming to a possible rescue on the price of generics: https://www.nytimes.com/2018/01/18/health/drug-prices-hospit...
A good chunk of student debt is due to the government printing money for loans that students can't escape. School saw this bottomless supply and acted accordingly.
Job exporting has some factors due to regulation too. As do the others in your list.
I'm not saying that regulation is bad. I believe in free markets, not unfettered markets. However, a lot of the regulation is old, duplicative, and contradictory. It makes being a business far more complex than it should be. Regulation hampers innovation. We need to remove regulatory cruft at all levels. We need to adopt evidence based regulations.
I'm a strong believer in using minimal but sufficient regulations and taxes to shape market growth.
There are some absolutely unnecessary regulations, like the loopholes Tesla has to go through to sell cars because traditional dealerships don't want to lose money, or unfair taxes against green energy - protectionism must die.
There are also outdated but reasonable regulations, like Seattle's density regulations. Our housing crisis is caused by the market lagging far behind economic growth because it took years for the public to recognize the city was growing, years to change the laws, and then more years for the normal construction timeline. Density regulations as a concept make sense, but we haven't figured out how to auto-scale limits to avoid falling behind.
And then there are areas where we do need more regulations. For example, we absolutely need more regulations on credit cards and loans in addition to better finance education in highschool. Consumers are responsible for being informed, but there's still no excuse for even offering to saddle someone with a high-interest loan that they can never hope to pay off... some people are simply too dumb to understand the math.
I like the phrase "evidence-based regulations", but sometimes the evidence is stale or measuring the wrong thing, and the data doesn't guarantee we implement the right system of incentives.
The main problem with regulation is that it's too easy to capture by various corporate lobbies. Propose a good plan, and see it get shredded and repurposed to serve those it's supposed to regulate. Congress is cheep, and campaign committees wield the purse strings to keep their members in check on policy issues, so the election system doesn't respond efficiently to abuses. We won't be able to get good regulation until we can get the lobbyists and campaign financiers out of there.
Regulatory capture only really happens when your democratic system has broken down anyway, at which point you have bigger issues than regulation. Which the US absolutely does.
>The main problem with regulation is that it's too easy to capture by various corporate lobbies.
This is like saying "the main problem with laws is..."
In fact, this false dichotomy between "more regulation" and "less regulation" is mainly an artefact of corporate lobby groups (plenty of examples in their propaganda of this).
It dumbs down the issue to a childlike level and lets them play two political blocs who might have fundamentally similar interests off against one another depending upon what particular legislation they want introduced or repealed.
>>The main problem with regulation is that it's too easy to capture by various corporate lobbies.
> This is like saying "the main problem with laws is..."
Is it ? A corporation that already pays employees higher than minimum wage can drive out smaller shops that do not pay much more than minimum wage by working to raise the minimum wage. This enables them to raise prices and screw customers over if the smaller shops go out of business.
'Murder laws help murders by allowing them to capture murder laws'
>Is it ? A corporation that already pays employees higher than minimum wage can drive out smaller shops that do not pay much more than minimum wage by working to raise the minimum wage.
If you're talking about, say, Walmart, they lobby very hard against minimum wage raises and even go as far as to threaten what appears to be self destructive behavior to prevent it from occurring (e.g. threats to close profitable stores).
Minimum wage goes up -> Walmart profits go down. It's that simple. (see minimum wage across state borders by Dube, Lester & Reich).
They drive out smaller shops by using their buying power to beat suppliers down on price, using their size to get sweetheart land deals and sweetheart tax deals with local officials desperate to bring jobs to the area.
The trouble is that income/wealth inequality is often ignored in macroeconomic models. The math gets tough and an easy way to simplify the equations is to assume an equilibrium growth path. More complex models use a dynamic stochastic general equilibrium, but an equilibrium all the same.
Unfortunately, the key feature of rising inequality is that it may move the system into an unstable equilibrium. For example, if a handful of billionaires hang out together at Davos and get a bit of groupthink, they might decide to misallocate some capital (accidentally). If they make a mistake in a truly dramatic fashion, (investing heavily in Bitcoin, for example) they could evaporate a large chunk of the nation's wealth. When a handful of actors has an extreme influence on capital allocation, we've effectively become a command-economy instead of a free-market economy.
I think the “us vs them” mentality is too strong here. Don’t you think these billionaires are just as against each other (if not more so) than against the common man?
I don't think they'd need to intentionally cooperate. In fact, one of the worst motivations could be competitive status-seeking. A few billionaires trying to go to space is good. What if 10 of them do it?
Read about Fordlandia. It's hard to measure the economic impact of Ford's obsessions on Detroit.
> us vs them
I'm not sure where you got that sense. Capitalist societies tend to create log-normal distributions of wealth. There's no threshold where you can say one person is "us" and the next on the curve is "them".
I think this is a good, probing comment, and I would invite you to consider one more factor, because it's a major one: government debt and unfunded liabilities. This amounts to trillions in the U.S., a number so large it defies comprehension. A common solution offered is to simply "tax more", but it's clear that gov spending, by and large, bonkers. I'm sure the reasons for this are the same ones that keep that fat-cats plump, but the big-picture IMO is solving the looming debt-crisis; without that, solving the issues you raised could be for naught.
(edit: removed precise amount of US debt because figure is debatable and I don't want to get caught in weeds. It's a $BIG_NUMBER.
National debt is a looming crisis, but the largest impact on the general public has been irrationally cutting government spending in the wrong areas (cutting $M from social programs to spend $B/$T on foreign wars).
Of course, the general public is screwed when the crisis hits - we don't have any off-shore bank accounts - and this administration has seriously shortened the timeline to crisis.
If we give the government the ability to appropriate funds for social programs and safety-nets, rather than merely enforcing the rights in the constitution, it is inevitable that these funds will inevitably be misappropriated and allocated in ways that benefit the politician and his buddies, primarily.
As we continue on, we discover that, lo and behold, the programs need even more money, time for a tax increase!
Further down the line, we discover that further tax-increases are not politically-viable... no problem, let's just add to the entitlement-burden and let's re-visit the issue.
Later still, it's time to start paying for those unfunded liabilities but, damn it, there's no money in the vault. No problem: let's just print more money, and while we're at it, let's loan it to ourselves and charge "ourselves" interest (the second "ourselves" of course means "taxpayers, LMAFO).
Repeat until your currency, economy, and society collapses.
Other nations have no problem funding social programs, because they maintain a reasonable tax rate for high-income/high-wealth entities and avoid expensive indefinite foreign wars.
Keep in mind that a lot, if not all, of those countries exist under the umbrella of protection that the United States military provides, and thus do not have the same budgetary requirements for their own forces. Otherwise, time to start learning how to say "Please don't shoot" in Russian.
(edit: don't take the above as the complete-picture, by any means, it's just another rarely-mentioned factor that I wanted to bring up. I believe there's a sweet-spot to be found for taxation & social-programs that has a net-gain for society.)
> To what degree does income inequality, consumer debt, and rapidly rising barriers of entry to high-income fields contribute slowing GDP growth? Is there research and evidence on the subject?
I would say that a huge factor contributing to low growth in developed countries is the fact that, on a global scale, they're just very rich and for most businesses it makes more sense to develop in countries with much lower costs. I.e. the next 50 years will be about poor countries slowly catching up with the developed ones, not about developed ones getting even more ahead.
Printing money for the past decade and giving it to large banks will have that effect. It's the same as giving $100 to every person at the market and then wondering why an Apple costs $100.50. The large investment banks are consumers of public equities.
But that doesn't mean it lost half it's value. If I printed an extra 100 trillion dollars and launched it into space that wouldn't affect the value of the dollar.
And the same thing was true during the bailout. 99% of that money was never spent so it didn't have any affect on the economy.
My original point was that that money entered the system via large investment banks, whom use it to invest in publicly traded securities. Most of that money doesn't make it to circulation, it just inflates the price of those assets instead of all goods in the wider economy.
In the UK, at least, the Bank of England used QE money to buy government bonds. This meant that the bond-holders could exchange their illiquid bonds for cash, which they then needed to do something with.
The BoE then collected and destroyed government payments on the bonds, so the net amount of money doesn't change in the long-term.
One side-effect of this is that the cost of bonds went up -- demand had increased -- so the profitability of buying them went down, meaning the banks were naturally incentivised to do something else with that money.
It's not a panacea, but it is quite a neat lever to have when you want to increase the supply of money without actually spending any. Unfortunately it still looks like the banks are being given lots of free cash, but it's not actually free.
A lot of it was a backstop in case it was needed, but those reserves were not tapped.
Basically the Fed made lines of credit (with strings attached) open to banks to guarantee liquidity, increasing trust in markets. Banks didn't withdraw the money, and some that did (or were forced to take it to dissuade bank runs on the others) paid it back quickly to get out from under the strings.
Here's [1] a decent source on the finances of the bailout (which were actually loans).
Assets can appreciate for two reasons, inflation which will increase future cash flow, or interests rates dropping which will decrease the discount rate.
Judging from low and stable inflation it's obviously the second as opposed to the first.
Sustained 3% US GDP growth is overly optimistic. We have 0.7% population growth, and no obvious major investments.
The computer boom is mostly over with the low hanging fruit taken. Prior to that we had IC engines and electricity, but nothing on the horizon seems to have that kind of potential to radically reshape society. And to double the economy every 25 years you need regular dramatic shits.
PS: Look at the past generation (20 years) and 3% are unusually good years.
1) AI. Somehow, we finally get the AI working, and it somehow produces a lot more jobs. I really think the opposite will happen, but who knows.
2) Climate Change. The ever rising waters and the ever worsening storms will cause nations to re/build large infrastructure projects. Think seawalls and repairing the NYC subway. I don't think that will be good, as it'll mostly just be debt spending, but who knows.
3) Biotech. With CRISPR and optogenetics combined, the ability to safely edit in vivo will explode. Change your eye color to pink in a week. New fruits and veggies. Everyone has a really skinny body-type. Etc. The FDA and other nation's agencies will be hesitant, but it'll happen either way. I think this has the biggest chance, though the time horizons are much longer than we are used to, maybe centuries.
Recall a few days ago some people were trying to reconstruct the genome of the first black man in Iceland. There's no way anyone could have a job doing that in anything but a very wealthy society.
In other words, AI won't create jobs in manufacturing, but it will enable unexpected jobs to be created that would otherwise not be cost-effective.
Maybe. But the issue is growth percentages. Others point out that 3% is now high. The question is if the fractalization of the economy (that AI may allow) will increase the growth rate to 5% or something.
#1 Seems more likely to destroy jobs than create them. It could be an engine for growth, but self driving for example have taken a long time and vast investment. It's useful, but seems to have limited direct benefits.
#2 is a broken window fallacy. It may create some up months, but you need increased productivity for sustained growth.
#3 Biotech has been around for a long time. It's a world of hard problems, and again you need increased effecency not novelty to drive sustained growth.
4) Unmanned mining in space - as automation and machine learning progress capturing the right asteroid could bring in a few Billion or Trillion worth of nickle or whatever.
Honestly, I'm bearish on space mining. The Earth has a lot of unexplored volume left. The oceans' floors are relatively unexplored in terms of mineral wealth, even just 100 miles offshore. Antarctica is also a giant mystery, with many potentially rich mountain ranges sitting under 1/2 mile of ice. Heck, in Australia people will buy land, walk around, and just find nuggets of gold sitting on the dirt, it's something of a 'thing' there [0] So, 10k/lbs flight costs aren't cheap enough yet to justify the very hazardous environment and delta-V costs. Maybe in a century, but for now it's a ways off.
Well, there is significant investment in this space (har har), with timelines much closer than a century making investors open their wallets today. And costs aren't really relevant in isolation, it's the ROI that matters.
Space mining is not the answer to things we can find otherwise on the ground. It is the answer to how we build things in space, and get things we can't get in bulk down here. The right rock could reshape our relationship to some of the rare earth metals, for example. Mining en masse in remote regions is no picnic, so if hundreds of millions invested in going up can bring many billions down on demand, the economics will make sense. Mining Antarctica for hundreds of millions of tonnes for a not-so-interesting minerals offers an upside that pales in comparison to the amazing nuggets we have floating around the solar system...
And if the economics are sound, technologically: if you combine a UAV and a brain about as good as we get in a Tesla you're just a few rockets away from some insane riches and the power to crush terrestrial markets on a whim... No soup for you <mineral producer>... that's the kind of thing Billionaires dream of.
The promises of low and micro g manufacturing, the decreasing weight requirements and increase intelligence systems, and holding the economic 'high ground' for humanities next step offer the potential to move the needle more than a little. Launch tech is the big bottleneck, so keep an eye on SpaceX :)
Your points about some unknown material/process in space being the key are correct. However, I don't think there is anything up there that we can't figure out how to make down here. There are some long, single grain, high weight elemental crystals that we can't make here, but they also takes millions of years to cool down in a vacuum. Space is really empty, and there really aren't any magic rocks up there. It's mostly just feldspar.
> he computer boom is mostly over with the low hanging fruit taken. Prior to that we had IC engines and electricity, but nothing on the horizon seems to have that kind of potential to radically reshape society. And to double the economy every 25 years you need regular dramatic shits.
Then the next revolution happens. I'm sure people were pessimistic during periods of lesser innovation before electricity, telephone, phonograph, movie camera, consumer appliances, radio, television, PCs, internet, smartphones... there's always something new. There may be many reasons to believe there won't be 3% growth — "the computer boom is mostly over" is not one of them.
That's where Peter Thiel screwed up in his pessimistic premise about flying cars vs tweets (used as an illustractive example of course).
At the same time Thiel was making that claim, CRISPR, AI, robotics, VR/AR, blockchain/crypto-currencies and a massive general leap in automation were working their way into the economy. We're also about to take a leap forward when it comes to space tech and transportation improvements (from electric vehicles, electric planes, to hyper-loop and subterranean tunnel transport, those are all likely only the beginning of a new generation of transport tech; the power of combining electric vehicles + radically better software + lower cost, will be vast and will remake every nation). To add to all of that, China throws a big X factor into the global economy, they'll add additional spark to invention/innovation, accelerating competition and improvement between the US-Europe-Asia (Thiel's observations apply primarily to a time range when China was dirt poor, as recently as 1994 they had a mere $500b in GDP).
What's more important, flying cars (which are wildly impractical even if you can do it well), or curing Hepatitis C? We did the latter at the same time Thiel was expressing his pessimism. At least 70 million people have Hepatitis C world-wide. Flying cars are a joke by comparison to the extraordinary scientific accomplishment of wiping out HepC over the next two decades. Thiel set up his bold premise at exactly the wrong time.
Most of those innovations however seem to be playing "catch-up" though and there's a huge question mark as to whether most (not necessarily all) of the benefit goes to capital holders. Even the innovations that do benefit as a percentage how much do they lift living standards by compared to innovations of old? Electricity meant I had light at night; think of your local neighborhood without sewerage, etc.
They are also "costing a lot more" in terms of training and intelligence so there's a question mark of how much the average person without capital or privilege can access them.
For me there's also a question of whether they are just playing catch up for increase in human population that's happened since the WW2 era - how many are not required if we just reduce population? Per capita are we really better of? There's a reason a lot of people are "nostalgic" for the period before the 1990's. There's also the negative things to consider of all this "innovation" such as environmental degradation, the massive increase in CO2 emissions, etc.
The "stagnant" economy (e.g food, land, health care) - the things most people need to survive comfortably have been increasing in cost significantly for most world economies. The innovations you state most of the world's population (who are mostly poor btw) would happily trade away for cheap more nutrient rich food, house, cheaper energy, etc.
Not saying hyperloops, blockchains and such aren't cool; I'm just questioning whether technology alone is what improves our quality of life. And all technology requires energy which is generally increasing in cost.
There's quite a bit on the horizon with potential to reshape society. Self-driving cars is perhaps the most obvious example, and the underlying technologies of computer vision and deep learning seem likely cause automation revolutions in a number of other fields.
AI should bring growth to GDP, but it will also most likely bring about even further concentration of wealth and income. The long-term results could depend a lot on public policy.
Seeking alpha is nearly impossible today, as you noted. Yield curves are flat. I'm not sure what that says exactly - obviously it's multivariate - but combined with the rise of cryptocurrency and the current government, we definitely have a unique situation on our hands.
Honestly, though, it's a great time to be young and taking chances. Resources to become an entrepreneur have never been more plentiful/cheap, and the current business environment is incredibly favorable. For now, anyway.
I think one of the big problems is that most people's retirement money gets pumped into the stock market to purchase shares on the SECONDARY market. When people buy shares on the secondary market, companies never see any of that money. But when companies sell shares directly to the public through the primary capital markets, that money can be invested to produce NEW goods and services which create economic GROWTH. The whole point of a stock market is for companies to raise money from the public to produce new goods and services and generate economic growth, but in reality companies are doing very little of this. In fact, they often do the OPPOSITE! Instead of raising capital by issuing new shares, companies burn their earnings buying back existing shares from the public. It's insane! Economists in the future will look back in amazement and wonder how we could have possibly been so stupid.
> Instead of raising capital by issuing new shares, companies burn their earnings buying back existing shares from the public. It's insane!
You're ignoring all the ways that companies use their stock as a currency. From employee compensation to non-cash acquisitions, companies absolutely benefit from the secondary market. Especially in an era of low interest rates, it makes more sense for companies to borrow capital when they need it rather than raising money by issuing new equity, especially when other ways of issuing equity come with tax advantages.
Having too much money in the company is just as bad as having too little. Companies that have something worth spending money on raise money (whether as rights issues, debt or something else) and spend it. Companies that have nothing profitable to do with their money give it to their shareholders (the fact that they tend to do buybacks rather than dividends is mainly an artefact of the tax system rather than a real difference). That's as it should be.
Real estate is doing well. It's still coming on strong after the '08 ditch. Interest rates are low and demand is still strong. When the stock market tops out, people will take their money out and buy real estate causing another rise. Eventually it will fall again. It seems that there is an 8-10 year market cycle, so it should be topping out soon. A rise in interest rates will be the leading indicator.
>When the stock market tops out, people will take their money out and buy real estate causing another rise.
If I understand correctly, you are saying that market sentiment that the stock market has reached its peak will result is real estate prices increasing. That’s a very optimistic take. When market sentiment thinks the peak has been reached, people start selling and you get a crash. Everyone can’t sell at the top.
I don’t think most people buy homes based on a guess of the stock market cycle. I think a more realistic model is: people sell stock and buy a house when it makes sense for their life and they can qualify. They take money out of the stock market (often a 401k) for the down payment and use it to meet reserve requirements. If the market crashes, people won’t be able to afford as much house and prices will drop.
If the stock market keeps going up, that will continue to be one of the factors supporting home prices.
Just to give a different perspective on the 'real estate is doing well', while still supporting your final point: the total mortgage debt in the US is $13 trillion, which is a quarter of the total US bond market,
Forgive my ignorance but how does the stock market as a whole keep growing if the GDP isn't growing at a similar rate? where is all the attributed value coming from?
Equities are only one sector. As a very simplistic model, imagine that companies were growing at the same time that property was getting less valuable, then we might see flat GDP but a growth in stocks and a fall in real-estate values. (Of course some real-estate holders are equity-funded, but many aren't; since returns are predictable and consistent, real-estate tends to be mostly funded by debt, whereas equity funding is more appropriate for more volatile things like research- or consumption-driven companies). The stock market correlates decently with "the economy" generally, but it's not the whole thing, and many would consider a portfolio that included both stocks and bonds, and perhaps property or other assets as well, to be more reflective of the overall economy.
Probably hidden inflation... There is only so much stuff someone needs to buy before starting to sink the rest into index funds/stocks/speculative things.
What value is being created here, exactly? There's plenty of idealistic notions being thrown around, but I've yet to see a single, real, useful product or service materialize
>Applied neural networks.
Same.
>Automation.
This is way too broad to be invested in. Of course the world is automating at a greater rate, but is this a cause for growth? Will automated factories produce more goods for the same consumers?
>Good electric cars. To the point where people are prepaying for something that might be built in a few years.
Again, how is this growth? People will simply replace their existing cars at a known rate with electric cars as they become available/affordable
>Good cheap batteries.
Granted this one would be a technological revolution greater than the internet, but it's just a fantasy for now. I think the grandparent is dead on here. Real inflation is 10 times the official rate since the mid 2000s. We are all playing with funny money these days, and this won't end well.
It's the greatest advance in money laundering ever invented. For that to work the proles need to be conned into participating so there is plenty of transaction volume to hide in.
It's really not a great way to launder money. To keep it off the books, you will need armies of individuals going out and buying it with cash through forums or whatever. Same to convert it back to cash. Otherwise, you are just buying and selling it through exchanged who, in the US, are going to report it on your 1099k.
Otherwise, you have to have a seemingly legitimate Enterprise that is accepting Bitcoin on a large scale. Which would cause you to stand out like a sore thumb to the authorities because no one in their right mind is using Bitcoin with $40 transaction fees.
I started a X business that only sells widget Y for bitcoins. You shuffle all the coins through intermediary wallets that use small payments. The current transaction fee is $20 but regardless of what it is you just scale how much you transfer based on that. Also, if you set up many dummy coinbase accounts, you can use GDAX to exchange it for fiat without fees so you really just need to funnel it into a lot of coinbase accounts that then progressively funnel it to you over time. You can set up a lot of coinbase accounts in a week if you task 50 employees for a week. The rest can probably be automated if you cared enough.
Creating tons of coinbase accounts is no easy task. You have to validate the accounts with multiple forms of ID and this pattern would eventually be found out and get flagged big time.
Then, you need different bank accounts for every single coinbase account you create and those require multiple forms of ID as well as valid SSN numbers which will be checked.
If you are referring to GDAX allowing you to transfer to USD, looks like it is FDIC insured, which means it is a US bank account, which means it is subject to KYC patriot act stuff and will be the same as opening any other us bank account.
How many people do you think crime syndicates employ? Also, maybe coinbase has changed its policies but when I signed up I just needed a bank account #. Also, if you don't intend to transfer to/from fiat, Coinbase doesn't need any ID AFAICT. So you transfer your several thousand bitcoin from your private wallet into the coinbase accounts you control. You then use coinbase's free exchange to send those coins to your laundered wallet that is set up for a legitimate cut-out business with all the right paperwork & whatnot for converting it to USD.
You do this so that each individual account can make small purchases over a long time horizon so it looks valid. Looking at coinbase's site, you only need a bank account if you're using fiat currencies. You'd probably also want to make it harder to detect all your laundering accounts by having them make purchases to other "legitimate" accounts too (e.g overstock) Obviously I'm not a criminal mastermind so this plan could very well fail, but I find it hard to believe that a digital cash currency couldn't be used to effectively launder money considering laundering is most effective for all-cash businesses (combined with good accountants/bankers like illegal organization employ these days to avoid all these problems).
Coinbase is required by law to verify after you reach a certain threshold (not a very high one either). So they will let you sign up with a bank account, but once you start using the account a bit, they will freeze your account and want all kinds of ID.
You're kidding on the "Applied neural networks" bit right? A good subset of the features you see on Facebook and Google have neural networks contributing to their functionality.
> Again, how is this growth? People will simply replace their existing cars at a known rate with electric cars as they become available/affordable
Since driverless vehicles and fleets are arriving roughly concurrent to electric vehicles, they're actually more likely to _reduce_ the volume of cars produced, after accounting for any increased, accelerated "fleet churn" buyers exert via aggregate demand to reach a faster critical mass on increasingly or perfectly safe cars.
Disagree. This is hotly debated, but, i think that the growth in demand for transportation will be so staggering (when AV's are introduced) it will more than offset efficiency for a long while.
> Since driverless vehicles and fleets are arriving roughly concurrent
I have said multiple times, and did sign again, that I do not believe driverless vehicles will automatically lead mass adoption of fleet/on-demand vehicles. I don't think they will be as much of a savings over human-piloted vehicles as the optimists think.
>From investor pov you can short dinos and ride disruptors. ez $$. Not saying tsla isn't overvalued though.
Except the "dinos" of GM, Nissan, BMW, Ford, and Hyundai are outproducing Tesla in the EV market, with a clear lead in affordability. Nissan Leaf is far and away the most popular EV ever built, having sold thousands more than all Tesla models combined (discounting unfulfilled preorders).
Baumol predicted this 50 years ago; it's called the "cost disease".
The inflation rate for a computer with a fixed set of specs is massively negative -- it gets cheaper every year. So it is for many technological devices.
But our whole economy is a mixture of technological stuff (that drops in cost over time, i.e. negative inflation) and non-technological stuff (burritos and health care).
The overall inflation rate is an average across the entire economy. Even if you believe the reporting is not distorted (which is dubious), then the fact that there are so many goods whose prices drop quickly over time, implies that there have to be many goods and services whose prices go up much faster than "inflation" would predict. Because something has to balance that average!
Baumol calls the technological stuff the "progressive sector" and the non-technological stuff the "stagnant sector". As time goes on, prices in the stagnant sector continue to rise until they consume almost all spending.
Baumol made specific predictions based on this model in 1960 that have turned out to be consistently true for 50 years ("the cost of healthcare will continue to rise to degrees that will seem scary" and so forth).
Furthermore, it's not like it is some weird complicated or hard-to-substantiate theory. It is just math, not much more complicated than the definition of the average. Given how big the consequences are, and how hard to argue with, it surprises me that this idea occupies so little of the public conversation.
What choice do we have? Keep your money in cash? Invest in bonds for 4% return? No thanks, I'll take my chances, especially with true inflation being higher than people think...
Right now I'm gradually liquidating my crypto stash and buying stocks instead.
So this actually points to a big problem with how we measure growth.
If you start from the assumption that well-being or some other desirable policy goal can be measured by income (profits, wages, etc), I'd argue most of the things in this list aren't likely to increase either wages or profits of companies.
But they are likely to create economic surplus - that thing that makes us want to trade/transact in the first place. Economic surplus is why you'd rather buy a Netflix package for $10 than rent a $3 video from the video store. You're massively better off with Netflix even though Netflix's profits and your wages haven't moved.
The problem is, we don't have a good way to measure this. Economists are aware of the problem, and it's something that makes comparison of GDP across decades difficult. There are many things that are better or flat-out new compared to what existed 50 years ago. How do you compare the experience of driving a modern, safe, smooth-driving car to an older one? Or the experience of talking cross-continent for practically nothing on Skype?
I agree that these technologies are going to reshape our world, I just don't think those gains are necessarily going to show up in GDP, at least not how we measure it today. And I also think this whole "real wages have stagnated" argument is a bit of a red herring. Maybe they have...so what. People are much, much better off today than they were even 20 years ago. We have more things, they're better in almost every way, less disease, the world is just 100% a better place, and anyone who says otherwise is just trying to push some redistributionist political agenda. I'm not saying inequality isn't a problem, but it's borderline lying to suggest our lives haven't gotten any better over the last 30 years because "real wages have stagnated".
I agree cryptocurrencies are mostly a fad, but AI, automation, electric (self-driving) cars, and good cheap batteries are definitely capable of driving productivity & growth. Lithium batteries are the IC of the 21st century. They've driven a lot of innovation already (smartphones, better laptops, tablets, smartwatches, EVs, consumer drones, etc), but there's a lot more to come in terms of mass market self-driving EVs, mass grid storage, electric aircraft (both robotic and not), etc.
It seems like this is the opposite of growth - as more jobs are automated, fewer people will be able to buy the products that are created by the automation.
Wall Street is now comfortable with the idea of very long-term tech investing and multiple consecutive years of no profit generation...
This is what Amazon has been doing for 20 years.
People don't buy Netflix stock because they think it's gonna be profitable tomorrow, but rather because they expect it to be so dominant that when they start generating profits, they would be massive.
Amazon is generating plenty of profit for investors. And the best kind of profit too, capital gains.
Why pay out dividends to your investors with after tax money that will be taxed again at a higher rate when you can just stash it overseas and buy more capital assets and let the stock grow in perpetuity. Same with apple.
As an investor, you don't need dividends, you just sell a few shares each quarter.
Apple does pay a dividend. And gives even more money to shareholders in the form of buybacks. The total shareholder yield (dividends plus buybacks, divided by market cap) looks quite different for Amazon and Apple:
> It's as if there is this new way of valuing companies that is not based on DCF.
Growth. Netflix is after a giant global market and investors would rather growth and investing in new content than a dividend. Yes, the stock has been on a tear, but they've also grown subscribers 25% YoY while also raising their prices. That's an impressive feat for a company already as large as Netflix.
I don't know why you are being downvoted. At some point you have to generate cash to justify your valuation. However if you look at amazon they have never generated cash relative to their valuation and its been like 20 something years.
It has returned 10x in the last 10 years so I don't think their investors are complaining.
If you look at google, facebook, and apple they are generating cash that would justify their valuations.
Amazon has had positive free cash flow every year since 2001.
Netflix has had free cash flow of -$53 million, -$840 million, -$1.6 billion, and -$2 billion in the last 4 years respectively, and their debt has grown to $5 billion.
Exactly, Amazon also has lot of assets. They have logistics networks across multiple countries, warehouses, data centers, etc. May not be commensurate to their market cap but it does give them a solid moat.
Netflix has assets too. They own a whole bunch of original shows and movies. For comparison, The Big Bang Theory has been worth a couple billion to CBS just in syndication.
They also have a worldwide CDN capable of delivering high definition video around the world.
And lastly, they have 20 years of movie viewing history. Their prediction models alone are probably worth many billions to the movie studios.
Netflix doesn't even own a studio, they pay others to produce their content.
They don't syndicate their shows, they don't sell much merchandise, and they don't sell their "prediction models" or user data.
Don't get me wrong, Netflix does a lot of things right but the way they manage their entertainment divisions is extremely odd. We have over a 100 years of lessons from Hollywood and paying others to produce your content will always be more expensive than making your own.
Their original shows and movies depreciate far faster than most other assets and do so much more unpredictably than most assets. That 39M non-cash charge was almost certainly because of an unexpected depreciation of House of Cards post Kevin Spacey.
That's how people justify investing in Amazon. But I don't know how they think Amazon can just stop reinvesting one day and make money. Every business line Amazon has is hyper competitive. Can Amazon actually raise prices in any of their businesses?
>> Every business line Amazon has is hyper competitive. Can Amazon actually raise prices in any of their businesses?
They have been for some time. Prime memberships, AWS pricing, etc. The lines are "competitive" but Amazon is so far ahead in most that it doesn't matter.
Aren’t their costs going up at least 25-30% because of Meltdown/Spectre mitigation performance penalties? Would they weather another 10-20% price hike on top of that?
25-30% is pretty pessimistic. Maybe on certain services, like a Redis box. On others, like your average web service, it probably won't move the needle much.
I'd ballpark around 5%. And that's for people who weren't overprovisioned in the first place, which is most people.
I came here to say this as well. The entire market is in a feeding frenzy. Theres simply no way this can continue. I've made 10% returns this year on my whole-market mutual fund since Jan 1.
There is a very large difference between investing and speculation, and blockchain currencies are a supreme example of a pump and dump speculation scam.
Putting aside 10% towards high risk / high reward investments can help balance a portfolio. Stocks are less risky but still a gamble, bonds are safer depending on who is backing them.
They're trading at 12X revenue. That's not so outlandish for a firm that nobody unsubscribes from, and that can raise prices without taking a revenue hit. (If they raise prices 15% a year for 5 years, that puts them at 6X revenue, and they're stickier than a lot of SaaS companies)
But what do I know? I thought Facebook was overvalued at $30 billion.
I think that it’s important to keep in mind that posts consisting of feelings like these can be described as memetic. Posting opinions like this can be a way for nations to try and influence the independent actors that make up other nations. Economic or political attacks can occur with fake news type meme opinion spreading.
Much of Netflix's valuation seems to be based on their ability to own the gate between people and all of Hollywood. That puts them in a position to take profits away from the people like Murdoch and bank it. The dirty tricks that the studios play on theatres don't work on Netflix or Amazon prime.
The 12 month forward earnings yield of S&P 500 was 5.4% as of last Friday, with a minority of analysts having updated their earnings estimate to incorporate recent tax rate changes. That yield means there's still an equity premium, even if earnings stay flat after 2018.
How do you reconcile with the fact that P/E ratio is still just 56. In 2000, just before the dotcom bubble burst, Nasdaq stocks traded at a staggering price-earnings ratio of 175.
Also, Netflix revenues have been growing at staggering rate too: https://ycharts.com/companies/NFLX/revenues. Remember market responds to change in revenue over time, not the absolute value of revenue. I think it wouldn't be fair to say that stock prices are completely out of sync with revenue growth.
I find it unnerving that more traditional businesses are still valued on DCF, whereas it seems that if you become a tech giant, than you can get around it by saying: We're the 800 pound gorilla in this market and we're going to gobble it up. Don't worry about our cash situation. Both NFLX and AMZN fit this bill.
Do stocks really trade based on DCF? That sounds like a fiction taught in schools. I thought in the real world they traded based on whatever the hell criteria the people trading them felt like.
They definitely don't trade based on DCF, and just one look at the stock market confirms this. DCF is just one method to put a valuation on a company. There are plenty other ways. The parameters chosen allow enough freedom to basically come up with any valuation you want anyway, so there's definitely no one "correct valuation" even if restricted to DCF.
People didn't understand my comment. Parent had written "Stocks trade based on discounted cash flow(DCF): while giving ample evidence to the contrary. So they should have bolstered their absurd claim with reference to another magical fact, the efficient market. Which ensures stocks trade at DCF.
On the other hand, as long as the current streaming services' back catalog of available movies and TV shows is so ridiculously meagre, BitTorrent will do pretty well, I suspect.
I wonder who's going to supply that back catalog. Both Apple and Amazon have a fairly lackluster collection. For the real good stuff, there's FilmStruck (which has a small but revolving portion of the Criterion Collection), MUBI and Fandor. But it's pretty ridiculous that you have to subscribe to a combination of these to get access to quality media.
Meanwhile, companies like MGM and Warner Bros. are sitting on huge, underused back catalogs from their entire company history that's not available to watch, not even on DVD.
This right here is extremely frustrating to me. There is approximately zero marginal cost to distribute that back-catalog, but they just keep it locked away. I think Amazon does the best job of the legal sources I have seen, though I find it hard to stomach paying $4 to watch a movie made before my parents were born.
If you don’t want to pay a few dollars to watch a movie and the parent comment finds ridiculous to subscribe to yet another provider, what incentive do they have to make their catalogs available?
It's really a boom and bust. As Netflix's 3rd party library continue to be siphoned off more people will turn to piracy because they're not going to subscribe to n different services.
N different services still come out cheaper than cable. I pay for Netflix, Hulu, and Amazon Prime (which comes with Video) so let's say ~ $30 a month. Compared to Cox Cable, it's not even close -- $30 is Cox' entry level cable offering (and I can't share it with my family, nor watch shows at my own leisure).
My bet is that there's plenty of cash still left. Until cable companies wise up (which is probably never), Netflix, Hulu and Amazon Video will continue printing money.
Edit: almost forgot that with cable you still get ads lol.
> N different services still come out cheaper than cable.
For the US which is used to pay triple digit sums a month for basic TV yes, but for Europeans? No way. For Germans, for example, it's the (mandatory) public-broadcast fee of 18€/month/household and maybe 20-30€ if you really really want pay TV (add another 30-40€ for the premium sports but these can be streamed all over the net). So basically the delta between public TV only (which covers private channels, too! Lots of stations here are OTA) and pay-TV is Netflix+Spotify+maaaybe one additional service, that's it.
Always found that interesting in Europe. In Brazil, you don't pay for "public-broadcast" (as we call here, open TV). But could you tell me more about private channels on public TV?
In Germany you have to get a TV License for every household that owns a TV. That money is used to fund public broadcasters like ARD, WDR, etc. Now, you can watch the privately funded TV stations from the same TV ofc, but they don't receive money from the Govt. Instead they are funded by ads, etc.
> In Brazil, you don't pay for "public-broadcast" […]
Are you sure the public broadcasters (e.g., EBC) aren't financed by tax-payer money? In the Netherlands there is no separate fee for public broadcasting, but we all pay for our public, free-to-air television and radio via taxes.
There is a mandatory fee that you will pay for being connected to cable (which most people are, even if they don't necessarily use the TV). This pays for the "free" channels that everyone gets.
Are you including the cable company's data cap tax of $50-$200+ per month?
These evil megacorps are running people into into the data cap (as streaming quantity/quality increases) and will adjust rates until they're sheering the sheep closer than ever before.
Expect to continue paying more for internet access despite cable company costs plummeting. You can thank the corrupt US gov officials that enable them.
I’m in Germany. My internet and phone bill is 27€/month. I – as many Germans – watch via satellite, so I pay 0€/month for private TV. The public broadcasting fee is 18€/month per household, no matter how many people live in one.
Netflix is definitely not going to be cheaper, and adding Amazon Prime and the other services on top even less. And I still wouldn’t get all the same content.
> Until cable companies wise up (which is probably never), Netflix, Hulu and Amazon Video will continue printing money.
Hulu lost over $600 million last year, so they must have a conveyor belt from the printer directly to the toilet. We'll see what happens once Disney takes majority control, but I bet this time next year Hulu's going to be very different.
That’s n different services just to get a decent coverage of recent releases. As for the back catalogue, I haven’t seen anything that is even close to decent.
I supplement the big ones with FilmStruck (has a subset of the Criterion Collection), MUBI and Fandor. Together they have a decent collection of "older" (pre-2010s) films.
I don't know for the other twos but Mubi doesn't have much of a collection. They have a rolling 30 titles chosen by them. It's interesting if you want to discover new movies (though heavily dependent on their taste being aligned to yours), but not so much if you pull the filmography of Gene Hackman on imdb and want to watch the movies you haven't seen already.
[edit] actually none of the other two you mentioned is available in the UK...
Right, MUBI is more like an online movie theater. FilmStruck and Fandor are traditional streaming services. They're small, though. I think FilmStruck's catalog numbers much less than a thousand.
That's entry level cable, with ads (as you mentioned), and that's before you pay all of the BS fees and rentals for the boxes and HD surcharges and recording surcharges and whatever else they come up with this year.
It's possible, but they're still cheaper than HBO Now, Showtime Now, etc. I found myself spending more time in Netflix watching their exclusively produced content than from their 3rd party library over the last year. As long as they can keep producing quality content to add to their library, I think they're in good shape.
BitTorrent is not going away anytime soon. If anything, it's going to get stronger while every content creator and distributor has their own streaming service.
When streaming video started and became bigger, Netflix was seen as a single source for most content. Now, and in the future, this reality isn't going to hold good. It's already painful to figure out where one can watch a certain movie or show (apps like the TV app on Apple TV can help, but only if the streaming apps support it). Content keeps appearing and disappearing on different services and seems like a game of whack-a-mole!
BitTorrent's main draw is that it will always remain a single source (at least for relatively recent content) than any other streaming content provider can ever dream of! If at all torrent sites look like they're shutting down and don't have much activity, it's probably because all the activity with private trackers thriving is invisible. Yes, private trackers also get busted once in a while, but there are many that sprout up in the wake of one's demise. Whoever used the term "hydra" for this phenomenon was right.
Bottom line, as long as "big content" wants to haggle between themselves and focuses on making it inconvenient for customers to access content, BitTorrent will continue to thrive.
I don't think these services will affect Torrents in a significant way.
I know people who have Amazon prime,yet torrent some shows because they are censored heavily in my country.
Also, nflx doesn't offer some movies I want In my country, so I use torrents and haven't had any noticeable problem regarding seeds.
It is very hard to gather statistics on this, but my intuition (casual observance) is that torrent seeding has been declining for the last 10 years, and I suspect streaming services play a non-trival role in the decline.
I agree. Kodi boxes and transient streaming sites seem to be the way most people pirate now. It makes sense that people pirate in ways that match global trends. When BitTorrent started piracy and legal consumption both meant actually downloading files, possibly over days. Now people are used to it all just being there, right when they want it.
Plus most popular games are multiplayer, so piracy is unlikely or niche. A lot of software is on mobile devices, or licensed as a SaaS. A lot of the underlying machinery of media distribution has changed, and so has piracy.
In France Netflix acts as a limited 1-season preview to tease me into torrenting the full series. House of Cards only had season 1 when the 4th was out in the USA.
Could it be that it's because Netflix arrived late in France and by that time it had already sold the rights to broadcast House of Cards in France to some pay TV network? In Australia we had similar issues. If that's the case, the situation should "normalise" in a couple of years, since the rights are usually time-constrained.
That’s when Netflix was starting out, no? Do you get both seasons of Stranger Things for example? Initially they selling rights to shows much more than I think they do now.
Unfortunately they've been letting their back catalog rot away but I still find a minimal DVD subscription to be a good way to watch both brand new and older films.
I'm not sure if it's just me or have there been zero new releases in the DVD section in 2018? Also sometimes I found DVD's on their top 100 list before they show up in the new releases section - like they don't want to have a bunch of people ask to rent a disc if they think it's going to be popular.
Funnily enough I was just looking at that. Admittedly I've seen a number of the releases coming out about now on planes and the like but there was essentially nothing in the New Releases that I was interested in.
Not only the catalog is rotting, but The physical discs have as well. We resubscribed to disc service last year, but have had a surprising number of cracked or heavily scratched discs compared to years ago.
I study stock market for more than a decade, for long term, and I perfectly now that company data should not be analysed in a isolatedly, but, any stock with P/E ratio 230.24 you need to be very careful, and put just the money you can afford to lose without disturb your sleep.
For whom that does not understand company ratios, a P/E ratio 230.24 is meaning that you need 230 years of profits to return to you the price you are paying today, of course, this does not consider that the company and profits will grow. But to have a parallel, at least in my country, really good companies have a P/E between 20 and 30, on average, and 30 is considered very high.
This view ignores revenue growth. If the company is growing like a weed it may choose to reinvest everything and keep profit near zero. If there's no dividend the profit would just go into a war chest and collect some minimal interest rate. If the company thinks it can get a better return on investment by spending all income on growing itself it has every reason to do so, and all it has to do is beat that minimal interest rate. The only reasons not to: you have no ideas where to spend your own money to result in growth, you expect that reportable earnings will look good to some investors, you want a war chest to make some giant acquisitions, or you're planning on starting to issue a dividend relatively soon.
Amazon has always had near zero earnings. Over the last 10 years its grown from ~$17 billion revenue to ~$140 billion in revenue. Yet they have almost no earnings! Barely profitable! It's wild and irresponsible! Yet Amazon is not on the brink of collapse. Despite near 10x growth their earnings have always been completely flat, near zero. Why is that? They're not booking earnings because they can't, they're not booking earnings because they're choosing not to, by spending it on growing themselves. It could be seen as a good thing: Amazon has lots of areas to invest in itself, if they didn't, maybe they're running out of ideas. Netflix has also grown by about the same multiple over the same time period as Amazon.
Now, on the other hand, Netflix's price to sales is about twice that of Amazon. Amazon's price to sales is about the same as Apple.
Yes, you are perfectly right! I confess I forgot about this point of the earnings. USA tax system is different of my country.
Here, companies pay taxes about all the income, and on USA you have deductions when reinvest income in some kind of expenses. I believe this is why some companies spend it almost all, because the rules of the game are favoring to to this.
So, the P/E ratio is almost irrelevant (or more complex to include on analysis) on USA than here.
I've held NFLX since 2013. I'd buy it again today, even at these prices.
My view is that profits are low because NFLX is investing everything in original content.Their last 4 quarters of profit is about $550 million. But their spend on original content is expected to be $7 - $8 Billion in 2018 [0]. Theoretically, that $7 - 8 Billion, less income tax, could fall to the bottom line, putting their P/E in a much more reasonable ~20 range.
AMZN is taking the same strategy: Invest in growth above all else and defer profits until the company is 'huge'. Moreover, for NFLX, revenue growth is accelerating (+23% 2016 vs. +30% 2017). Given the performance of management, both at NFLX and AMZN, it's a reasonable calculated risk to buy shares, even today, even at these outrageous prices.
For sure, dividends donesn't mean nothing here.
If a company is profitable and don't pay dividends to shareholders, they need to do something with the money that are accumulating, and they will invest on the company (new machines, products, services, etc. all accordingly with the company strategy), and if the company grows with this investments, the stock price will follows it.
How stock price follow it ? In a hypothetical scenario, if company declare not to pay any dividend any time in the future, nobody will invest in it no matter what.
Because the money is on the bank, and it's shareholders property.
The shareholders can change the administration council and hire people that will use the accumulated money to make more money, or use it paying dividends. The shareholders are the bosses, and chooses who occupies the administration council.
I don't know if my hypothetical example was clear.
If the company is closely held the shareholders may not be able to meaningfully affect the composition of the board of directors, and so may not be able to extract any value from it except in bankruptcy.
Really? Bitcoin pays no dividend and people buy it, even though at this point it's basically as useless as a stock that pays no dividend. I say this as a Bitcoin holder who does nothing with his Bitcoin because it's too slow and the transaction fees are too high.
Yes. Any public company must ultimately pay a dividend to be valuable.
Edit: All of my responders are ignoring my use of "ultimately". A company can certainly invest in growth, but growth only matters if the company eventually returns money to shareholders, and the only way to do that is a dividend.
This is nonsense. P/E is a measure of earnings against the price of one share. A high P/E does show that current earnings are small (or negative) in relation to share price, but there's no time component inherent in P/E.
A high P/E shows that the current profits are very far from the stock price. The expectation of grow are high. Good companies has high P/E too. On this case, 230 P/E is a really high expectation.
edpichler's description of P/E is correct. Quoting from wikipedia for a slightly more formal definition:
"Trailing P/E" uses the weighted average number of common shares in issue divided by the net income for the most recent 12-month period. This is the most common meaning of "P/E" if no other qualifier is specified.
Yes earnings is for the past 4 quarters but by time component I mean his assertion that "P/E ratio 230.24 is meaning that you need 230 years of profits to return to you the price you are paying today" which is utter nonsense.
Perhaps it would help if you could explain why it's wrong instead of calling it utter nonsense, because it matches my understanding of P/E ratio.
Here's the example from the same wikipedia link:
As an example, if stock A is trading at $24 and the earnings per share for the most recent 12-month period is $3, then stock A has a P/E ratio of 24/3 or 8. Put another way, the purchaser of the stock is investing $8 for every dollar of earnings.
Now say the company behind stock A is paying out 100% of its earnings as a yearly dividend of $3/share and is taking no additional investment, so it isn't growing. It's going to take 8 years (the P/E) to recoup the $24.
I've never seen a years recouped metric in reference to P/E used in a professional context ever. You don't see it because you're holding everything static. This makes no sense (particularly in the case of growth stocks) because the whole point is that you're expecting growth in earnings and that number is going to wildly change over time periods and what earnings you use.
One of the biggest reasons why P/E is a relevant metric is that it enables you to easily compare stocks between one another.
There absolutely is. For a company to be valuable, it must return more profit to shareholders than they put in. The P/E ratio indicates how long it will take for this to happen.
Not really, it indicates how long if nothing changes over the long term. Which never happens. Netflix is growing very rapidly which makes P/E all but meaningless for "how long" questions.
The metric that Netflix uses is subscriber count, and all indications is that the subscriber count is not growing at a pace that explains the PE ratio. In fact the growth is declining as evidenced by their guidance for the quarter.
That's under the assumption that all you can do with a stock is hold onto it and pocket all the profits.
If I buy a house, put in a pool, then sell the house for $100k more than I bought it a year later, it doesn't matter too much what the initial price was, except in comparison to other investments
You can always sell the Netflix stock after pocketing some dividends or something. The purchase price is not money lost, because now you have the stock.
I get P/E being important for someone trying to buy a company.
In raw "what is possible" terms I cannot fault you. But I really like the idea of fundamentals, and "what is likely" is a different kettle of fish.
In a sense, share prices compete with the cost of starting a new company that does the same thing. P/E ratios of 230:1 mean an increasing risk that instead of someone buying your shares, they go and start a competitor. Then everyone buys that competitor instead.
In any market there is an upper limit to the P/E ratio, and nobody wants to be the buyer who finds it. Especially if the company's income doesn't rise; because then you have to sell at a loss to recover any money.
In practice, there is also the risk of catching a collapse in the market. They happen that, once every decade or so? Great time to be able to rely on an income stream when that happens.
You are right, but I am talking about investing for long term.
For short term, most of the time, just the price chart is analysed.
Just to write here, long term and short term (speculation) is totally different. I was talking just about very long term.
Speak for yourself, I own some Amazon shares and I like their financial prospects... Bezos is playing the long game and I'm happy to be along for the ride.
I wouldn't put my money there. There is a lot of better choices with more return of investment. But, it's my money, you can do whatever you want with yours.
> There is a lot of better choices with more return of investment.
Except it has actually been one of the best choices to put your money for quite some time. Things can always change, but an average annualized return of 38% over the past five years is really hard to complain about.
Finding Netflix fairly frustrating these days. Despite their runaway success they haven’t really done anything to change the Hollywood model. 99.9% crap with a sprinkle of watchable content. And despite the hoards of engineers and machine learning wizards they employ, discovery and interface has regressed in their product. Only reason I haven’t canceled yet is avoiding the hassle of going full torrent/YouTube.
It is amazing to me that they offered a superior interface by any measure back in the DVD days. The AppleTV interface for Netflix is a disgrace. I don’t understand how they have all of these brilliant engineers, yet make an interface worse than what Spectrum provides.
I, for one, want a Tinder-like interface. Photo, title, synopsis, production budget, main cast, etc on each page. Swipe right to add to favorites, swipe left to reject. Choices presented best first as determined by machine learning model. It would be nice to be able to train multiple models, and to mix model predictions with those of friends and family. Separate favorite lists for things already watched and things not watched yet.
Second interface: "continue watching" list, most recently viewed at the top.
I personally find the Apple TV UI fine, not great but easy enough. However, discoverability is still horrible. It constantly shows the same recommendations over and over, including things I've just watched. You need to know what you want and then hope they have it online.
Not sure what you mean about the Hollywood model. Just about everything I've watched developed by Netflix has been above average. Maybe their junk is for things I'm not interested...
This. Most movies I want to watch are still not in there. I still pay my monthly membership and refuse to subscribe to anything else by principle. They were the first to move and they could become what we've always wanted, but that's if we support them.
Wanna see what a full blown network effect looks like, kidos — check out Netflix earnings.
More Subscribers ⤵️
More Revenue ⤵️
More $$ for Original Content and Licensing ⤵️
More bids won against networks ⤵️
More content on Netflix ⤵️
More Subscribers
Network effects occur when usage increases the value of the product, as with Google or Facebook. With Netflix, usage does not increase value. It instead creates more revenue, enabling Netflix to invest in fixed costs, creating scale economies.
To illustrate, if Netflix were boundlessly funded in their early days, they could create a product that's just as valuable as it is today, even though they had no customers, and therefore no network effects.
The one caveat is that friends talking about shows with each other does create real network effects, but not what you're describing here.
Surprised Netflix hasn't branched out into more content types or more dynamic content. You now have this two way communication channel seems kind of boring to not try and use it even just for mostly video content.
Some of their shows run 7+ million an episode. If you look at the development costs of simple mobile games and cut out all the stuff related to IAP it seems like they could create a lot of value for customers for pretty cheap by making some simple popular games without the IAP BS.
Are more people going to subscribe to Netflix because of this? Will they be distracted from the core business? Building a streaming video service is very different from building games of any sort, do they want to dilute their talent by going out and hiring for this?
Sorry but I just don't see how this in any makes sense other than, "hey Netflix is doing really well, why don't they pull a Google and start throwing spaghetti at the wall".
Do they ever actually hire people directly to make any of their content? I assumed it was all contracted out to production companies, I know it is for some shows. They could do the same thing for games just acting like a distributor.
I think it's more likely to keep people subscribed then generate new subscriptions. No one person is going to like all the content they make. Personally I'd really enjoy having some fun well made mobile games I knew wouldn't try to sucker me at every turn with IAP. I think people with kids would really appreciate this. Their competitive advantage is they don't have to worry about IAP or marketing.
I don't think this really falls into the category of "throwing spaghetti at the wall." It's creating entertainment content for a fixed monthly cost. Different entertainment, sure, but it's no self driving car.
Exactly how their current app works. You download from the app store then login to access the content. Each game is it's own app on the app store. Maybe it violates TOS but their current app and others like spotify use the same mechanic to restrict access.
Sense8, The Get Down, Marco Polo. They are planning on spending 8 billion on content this year. Lets say they spend 10 million on a couple puzzle/king/angry bird style games. That's .125% of their content creation budget.
Well, don't forget it's not just their own shows. It's been said Netflix's license payment is responsible for financing the $7m budget of Star Trek Discovery. Again, not their own show, but that's irrelevant for the point the parent is making (Netflix hasn't branched out into other content types and spends $7m per episode on video, but won't spend a similar amount on games).
That having been said, I don't really see the point for Netflix to pursue some kind of mini-steam play. Not a core competency and all...
Bummed about that. Enjoyed the premise. However, definitely not cheap to shoot on location across 5 continents (although i very much enjoyed the detail and contrast it provided)
Good content is evergreen and the more content they create, they increase the incentive fgor people to subscribe. You can also create content once and automate creating compatible devices for everything. Games come and go, but House of Cards Season 1 is still a reason to subscribe to Netflix today. Think how many people are still discovering The Wire for the first time on HBO Now.
There's a bubble. A bubble of desperation. You can't put your money in the bank due to the low interest rates. Traditional businesses are not doing well. Investors are desperate to put their money to work. So we see bubbles in tech, bubbles in cryptocurrencies, bubbles in startups.
Best to watch what the legendary investors are doing. People like Warren Buffett, Prem Watsa, and the likes.
Netflix generates $8B revenue with 3k staff, when Time Warner generates $28B with 25k staff. Both net income are equivalent ($3B). Both valuations are equivalent (100B). Dividends are equivalent. I don't see any bubble.
Given the right amount of capital and assets, Netflix sounds like way more capable of growing than Time Warner in the next 5 years. Time will tell.
The price-to-earnings ratio is now 230, meaning that if an acquirer were to buy the company for cash at its current market capitalization, absent any growth in earnings, it would take the acquirer 230 years to earn the money back, all else remaining the same.
However, the 230-year figure might be optimistic, because Netflix's cash flow from operations, before capital expenditures, has been negative for the past three years, largely due to fast-growing spending on content. Operations burned almost $1.8 billion last year. It could take longer than 230 years.
In theory, Netflix could stop aggressively investing in content any time now, and it would become more profitable. In theory, they could find other ways to monetize the content at some unspecified time in the future, to generate additional profits. In theory. In reality, it remains to be seen if they can and will do those things at some point in the future, and whether doing them will justify today's market capitalization.
It is, how shall I say this, questionable whether Netflix will be able to generate sufficient cash flow in the future to justify today's market capitalization. That said, I love the service and think the management team has done an amazing job building it, so I hope and wish they can pull it off, for the sake of their current investors, who must be relying on similar hopes and wishes.
BTW, Netflix is far from the most optimistically valued company today in terms of current earnings. Amazon's price-to-earnings multiple is currently 335, and Salesforce's is 14,796. These are not particularly unusual examples in today's stock market. There quite a few companies trading at high-double, triple, quadruple, and quintuple multiples of earnings.
In other words, there are currently many companies whose earnings-payback period, for a would-be cash acquirer, all else remaining the same, is in the many decades, centuries, millennia, or even greater. It makes no sense to me.
Wonder why Q4 had such a big bump but Q1 2018 seems to be dropping back down to prior levels. Is this just people purchasing subscriptions at the holiday? Discounts? Special content?
Netflix doesn’t have discount for holidays. They recently up the subscription price. My bet is the increase has to do with the holiday effect (more time at home), and the fact more collections are added. A good number of recent movies are available online (Amazon, YouTube, Netflix) as soon as they leave the box. Though the mote interesting graph would be views. During major sport events I can bet there is a big dip.
> Though the mote interesting graph would be views. During major sport events I can bet there is a big dip.
I was looking in my archive but I can't find the graphs right now.
Yeah, during big sporting events, there is a flattening of viewing. But what is really fascinating is that if you dig in, you find that it only affected devices that were typically connected to TVs. So streaming was normal on portable devices like iPads and Phones and the 3DS, but down on the big TVs.
However, the biggest dip of all happens during the Oscar telecast, second only to the Golden Globes. :)
New Year's eve was pretty flat too, but again only on the big TV devices (kid's devices were unaffected).
Can we infer from this that at the end of Q3 they had ~25 million subscribers?
I am not planning to cancel Netflix but I am frustrated at how terrible most of the content is, and how hard it is to find anything with the current interface. I hope they're rethinking their UX and reconsidering their current approach of "License a bunch of really cheap awful content to make it seem like there's a lot of stuff to watch."
Netflix is focused on original content. Their interface is designed to emphasize it as well as licensed movies and TV they think you’ll like. If your home screen is like mine, they barely have room to recommend licensed B-content anymore. It’s not my favorite way to display information, but they manage to display enough interesting material I haven’t seen yet to get me to choose one. Anything beyond that isn’t actually beneficial to me and I suspect I’d be in a minority of users if I refused to watch a good show in my recommended items because I didn’t see 30 recommended good shows.
> I am frustrated at how terrible most of the content is, and how hard it is to find anything with the current interface.
I use criticker.com to solve this problem. They have an "On Netflix" filter, that lists everything available on Netflix. They also have a rating system, where you can give movies a rating from 0 to 100. If you rate enough titles, it'll give you a "Probable Score" for each movie/series/documentary, that you haven't rated. I rated about 150 titles and their suggestions are quite accurate already. I can now sort the list of titles that is available on Netflix based on that "Probable Score" and work my way down from 100. Their interface is a little confusing and buggy at times, but it's really powerful (IMO). The database is quite complete, it contains stuff throughout the entire cinema history from multiple countries; series and documentaries as well.
I use the JustWatch app on my phone. You can tell it which services you subscribe too (it has many). You can even let it tell you where content is purchase-able.
The thing that bothers me is how long it takes for content to come to Netflix. For example, in NZ, I still don't have access to season 2 of The Expanse. Remind me again why I'm paying monthly for this service!?
That's a decision you need to answer for yourself. Netflix right now is their original content, their semi-origional content, lead generation for other streaming services, and titles you might reasonably find 50 copies of in the bargain bin of your local Best Buy.
To be fair, you are paying what? 11 dollars? Netflix isn't meant to be "all access to everything." If you wanted access to everything immediately it's going to cost a lot of money.
For a while, it was "access to nearly all old TV." a few years ago. But that was when old TV had little value. Nobody was paying for old TV and you couldn't even find it elsewhere.
Now, Netflix has made old TV valuable and has made new TV less valuable. Shows like The Expanse need to monetize on the reruns because the "first run" isn't enough anymore.
First run hasn't been enough for years before Netflix. Most shows lose money during their original run and made it back via syndication. Most shows on TV are sold by the production companies at a loss or the production company and network or owned by the same parent company.
That's part of the reason that people are asking what will happen to the Fox Network after Disney buys the rest of Fox. That also explains why relatively low rated scripted shows can survive on the CW - Warner owns half of CW and all of DC.
The Expanse is not their content, so it will always take longer to get to Netflix (if it ever shows up).
Amazon had a teaser for The Expanse, and season 1 was free. I ended up buying season 2, because I couldn't find good subtitles for the torrent I downloaded. I did this with Mr Robot, too. I can't hear as well as I used to and subtitles are really important to me.
In some markets, it's considered original content. Just like Designated Survivor, Riverdale it's considered original content too (in some countries, it may not be. Here in Brazil Riverdale it's exclusive to Warner Channel for example, and it will just go to Netflix when it ends on Warner I guess).
Here all (almost all?) BBC series go to Netflix as "original content". When it ends on BBC, then they release as original on Netflix.
That's gonna differ per region and series I guess. I am getting the new Good Place episode every friday.
Meanwhile, my Sonarr + NZBGet (+ ...) setup downloads it as well and serves it via Emby. But the Netflix app on Android TV is ace ('cept the suggestions aren't always great) whereas Emby would require using the Chromecast.
Disney is pulling/will pull out a lot of stuff from Netflix[1] and will also start its own streaming service[2]... and Netflix' catalog had already shrunk a lot before that news[3].
These days I prefer Amazon video content. It's also significantly cheaper. 5 bucks instead of 20. Then you add the fact that their Android app is bad and that not even Netflix Originals are available globally, Netflix doesn't seem to be that great.
My biggest problem with Netflix is discovery. I don't want to watch a new show because I don't want to commit myself to 50 episodes. And I don't even know if I'll like the show.
I just want to channel surf, like on TV. Just let me press a button and let me go through a bunch of videos so I can decide which one I like by watching it
How do they make money?? I mean - seriously? And how will they stand up now that NN is gone and any company/website using much more traffic will be force to pay more?
Please help me with the math -- at any given day, me, my wife and 2 kids are streaming netflix on multiple devices in HD; most likely pulling tens of gigabytes of data per day. How is that all covered under $10.99 per month?? and on the top - they make solid profit?? HOW??
They used to spend $0.05 per GB more or less per movie. I'm sure it's lower now. You may be a power streamer, but some people don't use it as much. The major cost used to be content licensing, but they are content creators now. Their top shows are becoming classics, drive tons of subscribers, and help with retention. The most important part is that they are still growing.
The problem is that if you're big enough business-wise you don't care that much about NN. It's like in Germany when Google has to pay for content in Google News and they just tell the publishers they will not include them if they don't give it to them for free despite these new rules (which are stupid). But if you're a small startup or company and you want to do this you have no chance doing this. Same goes for NN. If someone wants to block Google or Netflix now they can't really get that much from them because they need them to sell their own product or otherwise people will leave. If you're small no-one cares and your can't do anything about it. So it hurts innovation from new companies but doesn't hurt any big established players.
Besides that they also have enough revenue to invest in their own fiber infrastructure like Google does and really everyone wants to get good access to their content so they connect to them.
That might change when you are in competition with the ISP, as Comcast does with a ~30% stake of Hulu. Then you might start to care about net neutrality a lot.
Yes. That could be a problem. But in for most areas customers will be annoyed with Comcast and blame them for poor performance and switch. Still there are lots of areas in the US where you don't have a choice. But they would also loose a lot of customers in denser areas with more choice.
at the scale netflix transfers data they pay much much less than this. They also do direct peering and will put boxes in your ISP datacenter - https://openconnect.netflix.com/en/
Im sorry it still doesnt make sense to me. "buy 1 tone of fish pay $10 per kg", "buy 10,000 tone of fish, pay 1 cent". Doesnt make sense!! At some point more is not that much cheaper. I doubt coming back to my CDN asking for price on 1,000 TB would bring price to 1 cent per TB.
If they have a box in your ISP with a cache of the content, those Gigabits are coming from a a LAN and are basically free, only limited by the infrastructure.
Delivery of video bits costs next to nothing compared to the content. Netflix will spend 8 billion on content next year. They won't come within even an order of magnitude of that on infrastructure.
