Listen to me. If it weren't for ETFs -- specifically, if there weren't so many FANG-related ETFs, because the acronym stands out -- then what happened last night with Netflix (NFLX) wouldn't have mattered. We would have said, "Okay, the momentum guys decided that Netflix had lost its allure after a "less than stellar," set of numbers and they promptly journaled their money to some other fast-growing companies, namely the Facebook (FB) , Amazon (AMZN) and Alphabet/Google (GOOGL) . Why not? Even the sky-high valuation of Amazon makes it look like its smack in our atmosphere and not to the moon or even beyond Netflix. AMZN, FB and GOOGL are Action Alerts Plus holdings.
But, ahh, no such luck, because they are all bundled in idiotic and inane ETFs meant to represent FANG and friends purely because of acronymic affinity. In fact, it is almost like something out of The Three Musketeers, "One for all FANG and all for one." Whatever ails Netflix must ail Facebook -- and we have to question its social domination and its ambitions to have ad-supported videos be a mainstay. Whatever ails Netflix must ail Amazon, the dominant subscription retailer, especially on a day after the technologically brilliant Amazon is off its game with a site crash on Prime Day. Whatever ails Netflix must ail Alphabet, because both YouTube and Netflix are about watching video online.
So what if there is no basis in fact. All of FANG, of course, is now troubled with a lack of demand. Every FANG member is tainted, just because they are a part of FANG.
First, the big mistake Netflix made wasn't to produce a lot more losers than winners. It wasn't to have flop sequels, even as that was the most common transgression I read about. It wasn't even to raise prices too much and meet resistance. I think if it were the latter, these guys, as honest as the day is long, would simply own up to it.
No, it was to extrapolate, both with logic and proportion, that the company would have more than a million more subs come in because business had been smoking hot before. They predicted really wrong and I don't think they even yet know why.
Now the interrogator, Todd Juenger from Sanford Bernstein -- they only put on analyst on the call-- did everything right by the book. He wanted to be sure that there was nothing secular, nothing cataclysmic and nothing life-ending, as in "there's no one left to get to subscribe except those who can't afford it," and management did its best to disabuse him of that.
But there is a sort of law of large numbers at work that doesn't really have anything to do with the other letters that surround it in FANG, because the others continually reinvent themselves and add line extensions and new businesses. Facebook, Amazon and Alphabet rely on intellectual property that resides on their sites. Netflix made its initial success by borrowing or paying well below market prices for their movies and shows.
Think about the turbo-charged reinvention of, say, Facebook. Remember when Facebook added Instagram stories? Now that new business may be something that could cause a nice upside surprise. Alphabet is working on so many extraneous products that who knows where it will lead them. Amazon? When I heard last Friday that Amazon might start selling switches, the kind Cisco makes -- something that isn't even a good business anymore -- I found myself thinking is there anything they won't do?
Netflix just wants to entertain -- and that's not necessarily finite, but it isn't necessarily a true necessity, either. They have more than fifty million subs in a country of 320 million people, but how many share with each other? Yes, it's possible that all 7 billion people on the planet could take Netflix. But what if they can't afford it and don't have a machine to play it on? Sure, Netflix is a tough act to follow, but it does have the shallowest moat around it in all of FANG-dom.
Now overlay the idea that Netflix blew it with the fact that it is in these tightly-knit ETFs. They are all fast growers. Many have subscription businesses. But beyond that, what's the commonality besides the fact that FANG was always a cool acronym? Not much, except that they are all in ETFs -- and Netflix is so big and important in them that it is going to pull those ETFs down.
You know there isn't an ETF god. There isn't even a regulator. There are just fee-hungry firms who put together baskets that are meant to create and/or satisfy demand. Believe me, if I knew that this would happen I would have preferred to put the FANG Genie back in the bottle -- not that someone else wouldn't have ultimately crafted the linkage.
Still, the linkage is so bogus among say, Spotify (SPOT) or Adobe (ADBE) or Action Alerts Plus holding Salesforce.com (CRM) and Netflix as to render the nexus ludicrous. But the nexus made the marketers money -- and now it is our job to figure out when the Netflix "effect" has worn off and the companies that are doing well have stocks that are not ridiculously expensive the way Netflix -- the FANG we don't own for ActionAlertsPlus.com -- was before its bubble burst on a hot Monday afternoon after the close of trading.