The Power of Pricing Power: Tesla vs. Netflix

26 days into 2024, Netflix is up 22% year-to-date, while Tesla is down 26%. While various factors contribute to both performances (TKO deal, interest rates, etc.), I believe the divergence ultimately boils down to a shift in assessment of pricing power:

✧ Netflix:
▪ Strong Product & Strategic Pricing:
Despite the password crackdown, Netflix's content proved valuable enough for users to create new accounts (13 million subscriber additions in Q4 alone).
Additionally, introducing an entry-level tier not only widened the customer base but also:
- Increased prices at higher tiers, and
- Paved the way for future price hikes at the entry level.
▪ Investor Reassessment: This well-executed strategy, coupled with consistent user growth, led investors to recognize their underestimation of Netflix's competitive advantage and, consequently, its pricing power.

✧ Tesla:
▪ Demand vs. Supply Narrative: Traditionally, Tesla presented itself as a supply-constrained growth story, not demand-constrained, implying limitless demand and 50% annual production growth.
Reconsideration:
▪ Price & Target Cuts: Reductions across the product portfolio in H2 2023 has been unsettling investors. This week's news of lowered production targets further spooked them (“If demand is endless, why would you make less and sell the product even cheaper?”. Maybe Model 3 and Y market saturation occurred earlier than anticipated?
On the earnings call, Musk's cited higher interest rates necessitating price cuts and production adjustments - hinting at potential demand limitations.
▪ Investor Reassessment: This series of realities prompted investors to re-evaluate their previous overestimation of Tesla's competitive position and, consequently, its pricing power.

❏ Bottom Line:
While TAMs (Total Addressable Markets) are easily claimed, a company's true moat is reflected in its customer's willingness to pay a premium, reflecting its pricing power. As an investor, a lot of your skill lies in judging if the market is undermining or exaggerating it.

How do your investments fare? Share in comments below or on socials!