One of the market's hottest stock pickers is cooling on Netflix (NFLX 0.70%) these days. It could prove to be a costly mistake.
ARK Invest's Cathie Wood has been trimming her stake in the world's leading service for premium streaming video. She has sold Netflix shares in ARK Next Generation Internet ETF (ARKW 2.96%) four times over the past five weeks.
The exchange-traded fund has been one of the market's biggest winners, up a scintillating 183% through the past four quarters. It's true that owning Netflix has actually held Wood's high-flying ETF back. Reed Hastings' company only gained 39% in that time. However, history favors those who are long Netflix.
Wood isn't necessarily bearish on Netflix. It continues to be among the fund's holdings, and she has added to her Netflix position in one of her smaller ETFs. However, selling four small blocks of shares over the past few weeks (with the largest of the transactions taking place this past Friday) doesn't make it seem as if she's done reducing her position.
Netflix would appear to be a model for any risk-tolerant investor eyeing disruptive growth investments. The company put premium streaming on the map, and by the end of March its subscriber ranks stood at 207.6 million active accounts. Most of its growth lately has come internationally, where it's just starting to scratch the surface when it comes to reshaping the way viewers enjoy video entertainment.
It's hard to argue that Netflix isn't the equivalent of basic cable in the non-linear television world. No one is building out its content catalog faster than Netlix, and no one knows its viewers better than the pioneer in this niche, after collecting data on binge habits for more than a dozen years.
A testament to the power of Netflix is that it has increased its monthly ransoms for stateside customers five times over the past seven years. It continues to grow its user base despite the 75% price hike in that time. Its U.S. audience has doubled in that time, and its global audience has more than quadrupled.
We might arrive at the day when Netflix finally overestimates its pricing elasticity, but until then, it continues to earn its share of the entertainment dollar by spending more and more on content. This is a scalable business, and the wider it grows its audience, the more value it can deliver per subscriber.
It's hard to bet against Hastings and his team. Even when Netflix seems to do something small (like the low-key opening of an online merch store), it has a high chance of success because of its highly engaged audience. Wood obviously knows what she's doing, and the success of ARK Next Generation Internet ETF -- where Netflix was a relative drag on performance over the past year -- bears that out.
However, Netflix also has a longer track record of success than many of the fund's larger holdings. It also has proved its all-weather appeal, growing in times of economic expansion and contraction. Just as Netflix is becoming the world's default service for premium streaming video, it should also be standard in growth portfolios. One can't deny Wood's success when it comes to growth investing, but this time she might be selling the wrong stock.