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2018-07-17 09:18 by Karl Denninger
in Market Musings , 119 references
[Comments enabled]  

So Netfux stock got hammered overnight on a subscriber-growth miss -- in which they added basically zero in the United States.  This is called saturation and it was utterly inevitable, as it always is for any firm that is experiencing exponential growth.

Let's say you start with 100,000 customers.  You add 10% to that.  Now you have 110,000 customers.  10% of that is 11,000 adds next quarter, not 10,000.  And so it continues, which is a problem because to maintain the same rate of growth the numerical number of adds must always go up.

But it can't because there are a finite number of people.

Nobody -- literally nobody -- ever brings this up in the media and yet it is inevitable for all "growth" firms.  I knew this when I ran MCSNet; exactly where that inflection point was is always a matter of some debate but that it exists is an absolute certainty.  God help you if you fail to recognize and plan for that day.

The problem with that inflection point is that when you reach it the revenue growth rate will slow or even go to zero.  You had better not be in a position where you need ever-increasing revenue to stay alive at that point in time, such as for debt service that you've been adding to during the so-called "growth" or forward commitments in the form of orders from suppliers you cannot cancel or modify.  If you have put yourself in that position it's entirely possible to wind up bankrupt in a big hurry, especially if you have been financing into a generally-decreasing rate environment over either a cyclical or (in which case not even God can help you) secular decrease in interest rates.

Netfux has done exactly that with their "commitment" to spend on new shows, but now they're spending more and returning less for each new dollar they put forward.  It is just a matter of time now before the debt gets them.

They're not the only ones to rely on such idiocy.  So has Facesucker and Spamazon.

Never mind that Spamazon didn't learn a thing from the last debacles with their so-called "auto-adjusting" infrastructure.  They've had issues with not being able to scale supply quickly on the back end when it comes to product search and ordering, and more-stupidly, they linked fulfillment on the ground, that is, by their drivers, to the same system.  The result was that all the "cute puppy" displays yesterday (which incidentally they did not fix even late into the evening) also decimated their on-time delivery stats for yesterday as their logistics people couldn't do their jobs either.  That hasn't been reported in the mainslime media that is all so interested in propping up stock prices -- big shock.

Speaking of Spamazon if you want the one decent deal they have, and you do not need to spend the money on a Prime sub to get it, and you need a cellphone go look at the Essential PH-1.  They have one color at $249, which is half the price of the others.  At the original asking price it was ridiculous.  At the "new normal" price a few months later, $499, it was a "meh" sort of thing.  At $249 it's actually a good deal and will work on any of the US carriers.  It's "pure" Android without any carrier garbage, has flagship-level specs and due to its near-no-bezel design is reasonable in size in the hand while having a decent screen size to view.  Just buy a case for it; the back is ceramic and while beautiful, if you drop it you'll find out why you wanted a case.  That's the only actual deal Spamazon has; beyond that there's utterly no reason to buy anything from the king of the American Small-business Destroyer class.

Facesucker has the very same issue with sub growth -- it's been basically zero in the US for quite some time, and so has revenue growth from the US.  Yet the market doesn't care.  It damn well ought to since the US consumer is the one with all the money they can collect from advertising; in the EU they now have GDPR that limits the data mining and in the rest of the world the average consumer is dead flat broke compared against the US.  Does the market care?  Nope.  Not yet.

Is this the early March Moment from 2000?  Probably not; indeed it won't surprise me a bit if Netfux is back over $400 within days.  But it's a serious warning.  It's not that most of these firms are zeros, but it is that their margins are going to come in a lot, especially with the trade situation.  That in turn makes the "projection" of a "reasonable" stock price, given what it does to P/E/G, look like utter fantasy-land nonsense.  It is just a matter of time before the market figures that out and when it does you can easily expect the broader indices to be cut in half or more as basically all of the "expansion" in price has come from these high-flying tech stocks and when they crash by 90% or more -- and they will -- so will the market.

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