I Bought Netflix and AMD Stock Almost 10 Years Ago — Here’s Why
My thoughts on purchasing them almost a decade ago and why my investment strategy will never change
The greatest investments are always the simplest.
In 2011, I made two distinct, singular purchases. One of those purchases was in Netflix and the other was in AMD. I had been working for about two years at the time and almost all of my savings went into these two companies.
My brokerage account was brand new, but I had been following markets and thinking about the mathematics of revenue growth in new industries for some time.
My thinking was straightforward, and looking at my trades from almost 10 years ago highlights that my investing methods haven’t changed. It’s quite possible they never will.
The one trade above that makes me laugh is selling AMD at $5.951. It’s funny to see how my mind worked when I was 20.
For approximately seven years, I held Netflix. I sold AMD midway through 2019. I sold them each at prices equal to half of their current valuation.
The case for AMD and Netflix in 2011.
Netflix’s story begins at the tail end of 2011. Reed Hastings, the CEO, wanted to split the company into Netflix, the streaming service, and Qwikster, a company that will only do DVD rentals.
While many articles try to spin this approach as Netflix’s biggest blunder, what many people forget was how immaterial the move was in the long-run.
Following the news about the split, the stock tanked over 80% in valuation. Netflix cradled from the darling of the stock market to bankruptcy valuations in a matter of months.
The company split never happened — but it was also completely irrelevant.
By the end of 2019, their DVD revenues accounted for 1.5% of their total revenue. You didn’t need hindsight to understand in 2011 that Netflix splitting the company would have virtually no effect on their forward performance.
The end of 2011 wasn’t a bad year for Netflix, either. They had some growing pains due to international expansion, but they were adding domestic subscribers while continuing to grow overall.
Netflix’s business model is the same as it has always been. In fact, that growth curve wasn’t something imaginary or impossible; it was rather expected and realistic.
I already knew that Netflix was a bargain at its pre-pitfall price. I was still saving money at the time to begin investing, and I had an amazing opportunity to buy in on a company I believed in fully.
By the end of 2019, Netflix had almost 170 million subscribers. Over 10 years, they added about 140 million subscribers to their platform. The business model has remained the same since my initial purchase. Nothing about the company’s core business has changed. Market sentiment eventually returned to Netflix in a big way.
The story of AMD begins similarly: I was fascinated with semiconductor companies going into my very early 20s. I was born in the era that popularized the internet and personal computer; naturally, I was always caught tinkering with wires and hardware.
AMD was one of the first introductions I had to the semiconductor world along with Nvidia and Intel. Except, when I got older, I realized that Intel had a far larger valuation and Nvidia was primarily working with graphics processing units.
AMD competed in both spaces at a discount. They fabricated both CPUs and GPUs, and they did so at a bargain. For the longest stretch of time, Nvidia and Intel had the ability to either bury AMD in sales or pour more money into research and development and outpace them.
Neither of those things happened, and I generally always used AMD parts to build new computer rigs because they were available at far better price-points for the performance.
I purchased AMD at the tail-end of 2011. As the price began to drop for the four years following that trade, I continued to buy (smaller) portions of its stock throughout my college years. I would purchase more equity when I had the money, and I would look away.
I didn’t begin to realize massive gains on my initial investment until years passed. Which leads us to an important point in markets.
The art of anticipation and the ruse of the analyst.
I reiterate that I was basing my decision on the growth of the company. I believe both of these companies today are probably overvalued for different reasons I couldn’t summarize completely in this one post.
However, in their depleted form, they had analysts ready to call for their liquidation.
In fact, when it comes to listing the accuracy of an analyst’s ratings, you’d be better off flipping a coin.
In 2011, Tony Wible of Janney Capital Markets downgraded the stock to sell from neutral, stating that, “We believe the Netflix business model is unsustainable, as the company faces rising costs that it hoped it could pass on to its subscribers.”
Needham & Company’s Charlie Wolf reiterated his underperform rating on Netflix that same year. Goldman Sachs and Susquehanna Financial also downgraded the stock. Citi Investment Research analyst Mark Mahaney downgraded his rating from “Buy” to “Neutral”. Both he and Wedbush analyst Michael Pachter slashed their price targets by over 70%.
These people were all wrong for terrible reasons. In reality, knowledge isn’t attained or passed on by an analyst at a bank; it’s gained by understanding the business and placing the growth in context. Netflix was growing at a phenomenal rate before the company’s decision to split and after. The company, at its core, did not change. In fact, their momentum was just beginning. By the end of 2010, they added over 7 million new subscribers. By the end of 2011, they added just under 5 million new subscribers. That growth, as a proportion to the total subscribers they had at the time, was unheard of. Pretty much every year they added about 5 to 10 million subscribers.
Their growth wasn’t meteoric. It was slow, consistent, and realistic.
AMD suffered from the same expert opinion. In fact, Jim Cramer was advising his watchers to sell AMD at $5 or $6 a share in 2016:
“I am willing to bless the stock as a speculative trade, but if Kamich is right and AMD rallies up to $5 or $6, you need to ring the register and walk away, because this chip-maker is still way too risk to own as a long-term investment.”
Most analysts had similar negative outlooks when it came to AMD. But the chipmaker’s products haven’t been revolutionized in the last 10 years. It has followed the same growth curve that AMD has always known.
They’ve made great products, at a bargain, and they perform exceptionally well.
In fact, when we focus on the things Jim Cramer said to justify selling AMD, he said things like the following:
“You don’t see your stock fall below $2 if you are doing a good job.”
That alone is a headscratcher for an explanation of a complex semiconductor fabrication design and manufacturer. The entire technological development and complexity boiled down to an explanation of how many dollars your stock price should be if you’re doing a good job.
Analysts, ultimately, don’t matter.
Market irrationality and the eventual rubberband effect.
I sold both of my positions a while ago. Both companies have since doubled in stock price since I sold them. While I don’t have regrets about selling, I believe that they have seen their maturity and saturation in the market.
For the same reasons that the market was irrational back then, markets can eventually surpass realistic valuations to stretch into the territory of hyper valuation.
Markets remain irrational for long periods of time; in fact, if you’re doing anything other than holding the actual stock, your bets may be swallowed up by a bad stretch of market volatility against your desired direction.
The last 10 years has seen the spike in digital advertising on the internet. With the popularity in advertising has come the advent of data aggregation and organization. This has done a few things for companies like AMD:
- Hope that the growth continues indefinitely even though most start-ups that provide advertising revenue are bleeding indefinitely. (i.e. Uber, Lyft, Airbnb, Shopify)
- Continued capture of the server chip market as the advertising ramp-up fuels more data aggregation. This is, again, a hope that I don’t see and one that is stretching the valuation in the direction opposite from something realistic.
AMD’s price-to-earnings ratio sits at about 160 right now. The average price-to-earnings ratio on a company traded on the NASDAQ right now sits at about 31.
Netflix’s growth has been an amazing story. Their next growth story, however, is harder to see.
With account sharing in the United States, it’s difficult to see continued momentum. Netflix added just under 3 million net memberships in 2019, versus the usual 6 to 10 million that investors are used to seeing.
However, there is a new growth story developing: Their international segment is beginning to get underway. This is especially true in Europe, the Middle East, and Africa, where they had seen just under 14 million new subscribers. In Latin America, they added just over 5 million subscribers. In the Asia-Pacific, they saw about 5.6 million new subscribers.
However, that total revenue from all three regions is smaller than the entire revenue coming from the United States.
This is all while 100 million subscribers exist outside the United States. There are a few reasons for this:
- The difference between the average paying memberships and the paid memberships at end of period is greater than that of the United States — partially, this is because the service is still growing and stabilizing in those regions.
- The average revenue per membership is anywhere from 20% to 30% lower than membership in the United States.
This doesn’t mean that the Netflix growth story is over. It tells me that the growth story is beginning to look less clear. For that, I sold a bit earlier and missed this stretch of market gains.
Above were my personal thoughts on two companies that I believed in when I first started to get involved on the stock market. While I’ve learned how to use more tools when I’m trading today, my core investment strategy hasn’t changed over the last decade. I’m an avid buyer of companies that I firmly believe will have excellent growth stories in the future.
In the case of both Netflix and AMD, their growth stories weren’t even stories for years. In AMD’s case, the stock continued to fall by over 70% before market sentiment eventually changed. It continued to fall for over five years.
Netflix didn’t move much for another year or two either. I didn’t commit to doing anything weird or out of the ordinary; I simply held on to something I believed in and it paid off after a good number of years.
