Netflix and Tesla: Master Manipulators

Key Takeaways:

• Netflix and Tesla play the perception game better than anybody else. 
• They also play the market-share game better than anybody else. 
• Expect both stocks to continue to crush it in 2023 and beyond. 

Under CEO Steve Jobs, Apple (AAPL) became well-known for lowballing guidance ​– purposely understating earnings estimates so the actual number would surprise Wall Street and send the stock soaring. Brilliant move that eventually turned into a wink and a nod between Apple management and analysts covering the stock. 

The closest we have today to Jobs’ showmanship is probably what we’re seeing at Netflix (NFLX) and Tesla (TSLA). Never believe a word either company says or think anything it does will stick. 

But rest assured, while they have their own best interests in mind, outgoing Netflix CEO Reed Hastings (and his succession team) and Tesla CEO Elon Musk are also looking out for shareholders. 

Tesla first. In November, we expressed concern over Tesla’s still dominant but declining electric vehicle market share numbers: 

Tesla makes three of the top four EV models. And while other brands are gaining ground, they [don’t] seem to be gaining that much ground. Plus, you can attribute much of the ground they’ve gained to Tesla making EVs a thing.

But a new forward-looking analysis from S&P Global Mobility doesn’t bode great for Tesla.

While Tesla dominates today (65% market share), it doesn’t dominate as much as it did in 2020 (79%). By 2025, S&P expects Tesla to not dominate, dropping to less than 20% market share. 

Of course, the million-dollar question is will the overall EV market expand enough so that 20% market share in 2025 is basically the same as or better than 65% market share in 2022. Only time will tell. 

Musk isn’t waiting for time to tell. 

When he cut Tesla prices across the board earlier this month, he was making a market-share grab. With Teslas flying off the shelves at lower prices, the company’s bottom line might take a hit. 

But that’s okay. Musk will argue that, at this stage of Tesla’s growth, market share matters more. Expect Tesla’s declining market share to start trending up again. The stock, which has already bounced back nicely in 2023 – up 35.7% year to date – will continue to follow. 

Now Netflix. Here’s what we wrote about Netflix in November: 

It’s hard for The Juice to believe Netflix was being wholly forthright when, after losing 200,000 subscribers in Q1, it guided for a net loss of 2 million more in Q2. 

Not only did the company shed just 970,000 subs in Q2, it ended up gaining about 2.4 million in Q3 and predicts it’ll add another 4.5 million in Q4. […]

What better way for Netflix to reassert its streaming dominance than to humble itself after a misstep, lower expectations to the gutter, then blow everybody’s mind with “surprise” killer numbers. 

Lo and behold, this is exactly what happened when Netflix reported earnings earlier this month. The company added just shy of 7.7 million subscribers in Q4, blowing away expectations Steve Jobs style. And even though it missed earnings per share estimates by a mile, the stock soared. As we speak, NFLX is up over 21% YTD. 

NFLX trades on subscriber numbers. Which are basically market share. 

Tesla trades on market share. 

This is exactly how both management teams like it. They remain in growth mode. As long as that growth stays evident going forward, Wall Street will give both companies a pass if they report lackluster revenue or profit numbers. 

Pardon another comparison, but it’s a bit like the days when Amazon.com (AMZN) never turned a profit. Quarter after quarter, the company lost money, but investors didn’t care because the focus was on growth and market share. 

The Bottom Line: We’re witnessing pretty incredible execution on the perception fronts at Netflix and Tesla. Both companies shape the narrative to the one that best suits them, irrespective of things they said in the past. 

For example, there was a time when Netflix swore it would never run ads. Now, it’s not only running ads on a basic tier (which is a great idea and will eventually become a huge revenue source), it’s also considering a free ad-supported subscription. 

Similarly, some people might look at Tesla’s price-cutting as a dilution of the brand. In reality, it expands the company’s ownership of the EV market. 

Long-term investors take note.

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