Growth Darlings Become Value Stocks

Netflix, Meta, and Paypal are…Value Companies?

DISCLOSURE: Consilio Wealth Advisors, LLC is not recommending or affiliated with any of these companies; this is to show why stocks are classified as “value”. While we think there’s a place for some direct stock exposure, it should be in consideration with a well-diversified portfolio. Consult with your advisor to determine how best to approach your investment strategy. 

What once were high flyers, Netflix, Meta, and Paypal are moving to the Russell Value 1000 Index. No, it’s not because they’re going to start paying a dividend.

Value stocks are companies that are cheap relative to an index. There is some level of concern regarding the company’s operations or finances (or both). Contrary to popular belief, value companies carry added risk and uncertainty, making them historically riskier. 

Investors buy value companies banking on a reversal, which requires patience. Think about what Netflix, Meta, and Paypal have all recently gone through. Is a turnaround in the cards in the next few months? Years? All three companies are facing internal and external challenges that may take years to play out. 

Not all tech stocks are growth

What makes these companies suddenly classified as “value”? It is their current prices relative to their profits, or the price multiple. The market will pay a high price for a profitably growing company, which we will use the 2020 versions of these stocks as an example. Meta was attracting legions of advertisers because its platforms were the most popular across all demographics. Netflix benefited from stay-at-home orders. Paypal benefited from increased online shopping, spurred by stay-at-home. They all traded at premiums because their businesses were generating healthy and growing profits.

Fast forward to 2022 and the environment that these companies were succeeding in, suddenly swung the other direction. Absent of stay-at-home orders, consumer habits shifted to be more normalized. With the sharp sell-offs, the market could have overreacted because these companies were doing well prior to the pandemic. 

The inclusion in the value index is turning heads because we don’t think of Meta, Netflix, or PayPal as value. Mathematically it’s a value stock but there’s conflict with the classification of a company building high-growth technologies (e.g. metaverse).  

If you’re a growth investor, NFLX, META, and PYPL would no longer be part of your growth ETF. If you’re a value investor, you might find these names if you looked under the hood of your value ETF. Lots of retail investors will pick up a value index/ETF and won’t know they’re suddenly proud owners of NFLX. 

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