DJ Got Netflix and Tesla Wrong? Welcome to the Benevolent Order of Capitulating Bears. -- Barrons.com

By Jack Hough

I'm starting a support group for capitulating bears. Picture more of a lodge feel than a 12-step one. There will be hats with furry ears, one stitched with the ticker symbol for Tesla (ticker: TSLA), and the other with Netflix (NFLX). We'll sponsor a little league team, not worry about its fundamentals, and insist it can go all the way. Our secret handshake will be a short squeeze.

Mind you, my own gloom has been limited to individual highfliers. I've been bullish on the market for years, because I long ago resolved to always guess up. Two-thirds of the time I'm right, and the other third, I'm early, and it's the Federal Reserve's fault.

Predicting S&P 500 returns is easy, too. I start with earnings growth, pegged at 10% this year. Divide by half, for estimate cuts. Add two points for dividends. Take off a point, in case elevated price/earnings ratios ease. Now add that point back, because with interest rates this low, reversion to the mean is on disability leave.

My calculator watch says all that comes to 7%. The margin of error is 45 points in either direction.

Fast-growing companies are the difficult part. I've been cautious about Netflix, by far the best-performing stock in the S&P 500 over the past decade, which is starting to feel like having a Sell rating on joy. This past week it missed forecasts for U.S. subscriber growth, and its shares gave up 4% in a day. My inner, recovering bear is tempted to growl about rising competition: This quarter will be the first full one for Disney+, and next quarter will see the launch of NBC's Peacock and HBO Max.

But Netflix now has five subscribers outside the U.S. for every three inside, and it easily beat expectations for international growth in its latest report. Its rivals might not match its reach for many years. Management says the $3.3 billion it burned in 2019 was the low point, and that it will consume $2.5 billion this year "on the glide path, slowly, towards positive free cash flow." Daniel Salmon, who covers the stock for BMO Capital, wrote that Netflix could soon attract interest from growth-at-a-reasonable-price investors. He sees more than 25% upside.

Skeptical? I'm trying to quit, thanks. Until this bull market rolls over, my comments on Netflix will be best summed up by two shows it licenses: "Cheers" and "Glee." No "Lost In Space" cracks, please.

Tesla has left treadmarks on my doubt, too. It's stock is up 123% in just six months. This past week the company became the world's second most valuable car maker behind Toyota (TM), if we count only shares, not debt. And Patrick Hummel at UBS published the most complimentary Sell recommendation I've seen. "We take a more bullish fundamental view on Tesla's technology and cost lead in hardware & software," he wrote, raising his price target from $160 to $410, versus the stock's recent $572.

Hummel expects 10% operating margins and $3 billion to $5 billion in annual free cash flow from 2020 on. But he thinks shares are "over-shooting right now."

Maybe. But I've been underestimating over-shooters for too long. That's why I'm trying to turn incautiously optimistic on fast-growers. It's difficult, so I need the Benevolent Order of Capitulating Bears for support. If you elect me Poobah, I have plenty of ideas. Frankly, I've been impressed with what the Shriners have done riding those little cars at charity events. I have a plan involving miniature Pelotons. That reminds me: Have you seen that this fiscal year's cash burn estimates for Peloton Interactive (PTON) have more than doubled since September, to $538 million?

Sorry. Old habit.

Read more Streetwise: Buy These Car Chip Makers Instead of Tesla or GM

Write to Jack Hough at jack.hough@barrons.com

(END) Dow Jones Newswires

January 24, 2020 06:14 ET (11:14 GMT)

DJ Got Netflix and Tesla Stock Wrong? Welcome to the Benevolent Order of Capitulating Bears. -- Barrons.com

By Jack Hough

I'm starting a support group for capitulating bears. Picture more of a lodge feel than a 12-step one. There will be hats with furry ears, one stitched with the ticker symbol for Tesla (ticker: TSLA), and the other with Netflix (NFLX). We'll sponsor a Little League team, not worry about its fundamentals, and insist it can go all the way. Our secret handshake will be a short squeeze.

Mind you, my own gloom has been limited to individual highfliers. I've been bullish on the market for years, because I long ago resolved to always guess up. Two-thirds of the time I'm right, and the other third, I'm early, and it's the Federal Reserve's fault.

Predicting S&P 500 returns is easy, too. I start with earnings growth, pegged at 10% this year. Divide by half, for estimate cuts. Add two points for dividends. Take off a point, in case elevated price/earnings ratios ease. Now add that point back, because with interest rates this low, reversion to the mean is on disability leave.

My calculator watch says all that comes to 7%. The margin of error is 45 points in either direction.

Fast-growing companies are the difficult part. I've been cautious about Netflix, by far the best-performing stock in the S&P 500 over the past decade, which is starting to feel like having a Sell rating on joy. This past week it missed forecasts for U.S. subscriber growth, and its shares gave up 4% in a day. My inner, recovering bear is tempted to growl about rising competition: This quarter will be the first full one for Disney+, and next quarter will see the launch of NBC's Peacock and HBO Max.

But Netflix now has more than five subscribers outside the U.S. for every three inside, and it easily beat expectations for international growth in its latest report. Its rivals might not match its reach for many years. Management says the $3.3 billion it burned in 2019 was the low point, and that it will consume $2.5 billion this year "on the glide path, slowly, towards positive free cash flow." Daniel Salmon, who covers the stock for BMO Capital, wrote that Netflix could soon attract interest from growth-at-a-reasonable-price investors. He sees more than 25% upside.

Skeptical? I'm trying to quit, thanks. Until this bull market rolls over, my comments on Netflix will be best summed up by two shows it licenses: "Cheers" and "Glee." No "Lost In Space" cracks, please.

Tesla has left tread marks on my doubt, too. Its stock is up 123% in just six months. This past week the company became the world's second most valuable car maker behind Toyota Motor (TM), if we count only shares, not debt. And Patrick Hummel at UBS published the most complimentary Sell recommendation I've seen. "We take a more bullish fundamental view on Tesla's technology and cost lead in hardware & software," he wrote, raising his price target from $160 to $410, versus the stock's recent $572.

Hummel expects 10% operating margins and $3 billion to $5 billion in annual free cash flow from 2022 on. But he thinks shares are "over-shooting right now."

Maybe. But I've been underestimating over-shooters for too long. That's why I'm trying to turn incautiously optimistic on fast-growers. It's difficult, so I need the Benevolent Order of Capitulating Bears for support. If you elect me Poobah, I have plenty of ideas. Frankly, I've been impressed with what the Shriners have done riding those little cars at charity events. I have a plan involving miniature Pelotons. That reminds me: Have you seen that this fiscal year's cash burn estimates for Peloton Interactive (PTON) have more than doubled since September, to $538 million?

Sorry. Old habit.

Corrections & Amplifications

UBS analyst Patrick Hummel expects Tesla to have 10% operating margins and $3 billion to $5 billion in annual free cash flow from 2022 on. An earlier version of this article incorrectly said the projections were from 2020 on.

Write to Jack Hough at jack.hough@barrons.com

(END) Dow Jones Newswires

January 26, 2020 10:32 ET (15:32 GMT)

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