By Jeff Reeves, MarketWatch
Wall Street is littered with examples of high-growth stocks that flamed out spectacularly.
Consider Crocs /zigman2/quotes/201458716/composite CROX +4.22% , which rode a footwear craze to 400% gains in a roughly a year — before a change in consumer tastes coupled with the financial crisis caused the stock to give it all back. Or 3-D printing stocks, such as 3D Systems /zigman2/quotes/204115574/composite DDD +2.31% and Stratasys /zigman2/quotes/207628786/composite SSYS +2.42% , which were nearly 200% winners in 2013, only to give back all the gains in a year or two.
There are countless other examples, and it’s a cycle all investors should be familiar with: A great narrative that connects with Wall Street, a stock chart that looks like a hockey stick and the promise of near-certain growth.
Until, you know, the growth isn’t there anymore. And the bottom falls out.
In the last few years, many tech investors have seemingly forgotten this arc and instead placed big winners, including Netflix /zigman2/quotes/202353025/composite NFLX +8.07% and Facebook /zigman2/quotes/205064656/composite FB +0.23% , in a class by themselves. Yes, funky footwear products were doomed to hit a ceiling eventually. And yes, it’s natural that investors looked beyond the hype and hot air that lifted 3-D printing stocks at one time. But many thought Facebook and Netflix were different.
Here’s why the growth stories at Facebook, Netflix and other highflying tech stocks may not be as bulletproof as many have been led to believe.
We’ve reached the end of the internet
The promise of any internet-oriented company is that growth is limitless. Software scales quickly and with amazing margins, and every human with an internet connection is a potential customer.
But what happens when you run out of humans?
That’s not a rhetorical question. According to Pew Research Center, 89% of Americans are active on the internet . Exclude Americans 50 and older, and that jumps to 97%. Almost a quarter of Americans say they are almost constantly online .
The idea that America’s internet addicts simply haven’t heard of Facebook or Netflix is just plain dumb. And the numbers bear that out.
Facebook’s daily active users in the U.S. and Canada have gone almost nowhere in the last year, increasing from 183 million in the second quarter of 2017 to 185 million in the second quarter of this year. Europe is equally bland, with growth from 271 million to 279 million in the last year. Collectively, these two regions added just 10 million new daily users — a mere 2.2% of the daily total.
That’s what happens when you have so many users. Even 10 million more people simply don’t dramatically move the needle.
Netflix admittedly has done a bit better, showing domestic streaming subscriptions rose by double digits year-over-year in its latest report.
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