Facebook, Tesla and Netflix comebacks show how investors can overreact to headlines and miss out

Key Points
  • Investors who sold Facebook, Tesla or Netflix stocks on negative news developments last year missed out on big gains.
  • Each of these companies have staged impressive comebacks thanks to improved results and a bull market.
  • Headlines don't always provide the whole story and sometimes the analysts are wrong.
Facebook Chairman and CEO Mark Zuckerberg testifies at a House Financial Services Committee hearing in Washington, October 23, 2019.
Erin Scott | Reuters

If you believed last year's headlines, Facebook would be broken up, Tesla would never turn a profit, and Netflix would soon be clobbered by Disney+ and other upstart streaming competitors.

Each of those stocks took headline hits — and for good reasons at the time — but investors who sold or shorted shares on the negative news made losing bets.

Facebook now trades at an all-time high, Tesla recently reached a new high, and Netflix is up about 33% after hitting it's 52-week low in September.

To be sure, these big-name stocks are benefiting from a raging bull market, kicked to a gallop with rate cuts from the Federal Reserve. Still, these three companies demonstrate how quickly markets can look past headlines, negative analyst reports and fears of the moment to spot opportunity.

Here's a look at what happened with each of them:

An about-Facebook

Facebook's stock already had dropped precipitously amid calls for its breakup when the Federal Trade Commission opened an antitrust probe into the social media giant in July.

Among a litany of complaints, Facebook's critics accused it of damaging democracy after Cambridge Analytica was able to leverage personal data from millions of users for political advertising strategies. Facebook has also been fighting demands that it cease running false political advertisements, and it's been battling to launch a new digital currency, libra.

In June, as Facebook's stock fell amid the controversies, Needham predicted growing calls for regulation would be damaging.

"Governments have unlimited time and money and they believe they are protecting big ideas such as liberty, fairness, consumers, competition, etc." Needham analysts wrote. "They do not care what it costs. We believe that even if FB can continue to grow users and revenue, its margins will fall and headline risks will rise steadily through the Nov 2020 US election."

Investors, however, shrugged it off as the bull market reached for new highs and Facebook continued to grow.

In its Oct. 30 earnings release, Facebook reported that its daily active users increased to an average of 1.62 billion for September 2019, an increase of 9% year over year. Revenue for Facebook's third quarter was up 29% to $17.65 billion. Earnings per share rose 20% to $2.12.

Deutsche Bank analyst Lloyd Walmsley attributes Facebook's success to basic blocking and tackling:

"We are bullish on Facebook and see the renewed strength in the core Facebook app becoming a critical leg of the story around FB shares in 2020," he said in a December research note. "This was not a coincidence, but the result of extensive product work — reworking the core newsfeed algorithm, promoting meaningful content, rolling out Stories, scaling Marketplace, building its Groups product, adding more video content and continuing to improve relevancy algorithms across content and ads."

Tesla's shocking turnaround

The electric automaker has suffered a raft of controversies, including gaffes from it's idiosyncratic co-founder and CEO Elon Musk to worries about profitability and the ability to borrow money.

In April, Musk came to a settlement with securities regulators that required lawyers to review his use of Twitter. The Securities and Exchange Commission had sued Musk after he tweeted he had secured funding to take Tesla private. The tweet sent Tesla stock up more than 13% and allegedly violated securities laws. It also undermined investor confidence.

On May 30, Barclays analysts wrote that demand for Tesla's Model 3 was stagnating and the company didn't have a path to profitability.

"We used a key theme from the classic sci-fi film 'The Matrix' to explain the disconnect between us and the market in valuing Tesla shares." the analysts wrote. "In the film, Neo is offered a choice between a red pill, which allows him to see the universe as it is ... or a blue pill, which allows him to continue in his ignorant bliss. On Tesla, we think many investors had initially taken the blue pill, while we remained stubbornly in the red pill camp."

In July, Tesla reported wider-than-expected losses and announced that co-founder JB Straubel was leaving his post as chief technology officer. The stock swooned.

Tesla's fortunes, however, have swiftly turned following better-than-expected fourth-quarter deliveries of the Model 3 as well as the lighting-fast construction and opening of a Model 3 production plant in Shanghai. Analysts now see the company opening huge markets for itself in China.

Today, Tesla stock is up nearly 97% over the past three months, and Musk was dancing earlier this week at a Model 3 celebration at the company's Shanghai factory.

Netflix not losing to Disney+

Netflix stock stumbled last year as investors wondered how many subscribers it could lose with the launch of Disney+ and the emergence of several other streaming video competitors, including Apple TV.

What many saw as fierce competition was dubbed the "Streaming Wars" with Disney+ named as Netflix's greatest challenger.

Netflix, however, has held on to its subscriber base after the Nov. 12 launch of Disney+. It turns out, streaming services aren't an either-or proposition with many subscribers taking on more than one service.

"'Streaming wars' are overblown," wrote Raymond James' Justin Patterson in November, putting a strong buy rating on the stock.

Headline risk

It seems that in a bull market, headline risk can mean paying too much attention to individual headlines and missing the big picture.

A similar trend has played out in the broader market this week in assessing the headlines that began hitting last week regarding a U.S. airstrike that killed a top Iranian military commander.

Stocks fell sharply in overnight trading and oil prices surged, but by Wednesday oil prices were pulling back and stocks were reaching for new highs. The Dow Jones Industrial average topped 29,000 for the first time on Friday.

"The lesson from the last couple of years is it's quite dangerous to get trapped in these risk-aversion news cycles," said Jens Nordvig, CEO of Exante Data, "because they don't tend to last very long."

Correction: Netflix hit a 52-week low in September. An earlier version misstated the month.