Avoiding the AI arms race and buying Netflix

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Welcome to the Supernatural Stocks podcast in a week where the markets are tough and ugly for a lot of people. But here are two numbers from the past week that I want you to chew on …

First up, we have “France 2030” – the French government’s initiative to attract researchers in health, climate action, AI and fundamental sciences.

“We believe in science” proclaimed [French President] Emmanuel Macron on X, with no sign of those wonderful shades from Davos that have become a meme. Frankly, the amount announced is even more worthy of being a meme.

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Just €30 million was the figure attached to a statement about how “science has found its home”. Really? €30 million? I can’t speak for the health initiatives, but that is quite literally a drop in the ocean in AI.

And this is France we are talking about – the country that seems to have stepped into the lead role in Europe. Yikes.

Here’s the other number I wanted to share with you: $200 billion. Or, put differently, around €185 billion – over 6 000 times larger than the amount announced by France.

The relevance?

This is Amazon’s planned capex for FY26. Yes, the American company will be outspending Europe’s sovereign champion by 6 000 times – and in reality, it’s more than that if you dig into that French number to try and isolate the AI portion, but with that kind of difference, who cares?

We are in an arms race, folks. And I’m not talking about the one that is doing wonders for European defence stocks – Rheinmetall is up 125% in the past year.

I’m talking about weapons of a different kind: the race to win in AI. And let’s face it – over the long term, that’s almost certainly the more important race.

Listen/read: Capital rotations: Defence and technology

I know the Amazon and France numbers aren’t a perfect comparison, and I know there are other investment initiatives in Europe around this.

But there are also many other companies in the US spending on cloud and AI, so the fact remains that Europe is just messing around on the fringes of this technology, no matter how cool those sunglasses are.

America is clearly winning this race. Europe is barely even out the starting blocks, with ASML as the only major company in Europe that is winning in AI.

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But is this an AI arms race that investors are cheering for, or booing?

Races only have one winner

When you see a period of rapid change in an industry, it’s usually accompanied by so much noise and disruption that investors are bleeding across the board. Normally, this happens in industries where the players are still being incubated with venture capital money.

The cash losses happen in private, with the focus being on key revenue milestones rather than profits. Valuations reflect the risk in the journey.

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Those who are participating have sized their positions accordingly and usually built up a basket of stocks in the hope that a couple will be big winners and the rest will go to zero.

But in this case, the AI build-out is happening in public – warts and all.

Investors who bought into stories like Microsoft for its wide-moat software business are now watching their margins get diluted by the growth and investment in the Intelligent Cloud segment. This inevitably impacts valuation multiples, at least in the near-term until winners are established.

Microsoft has survived major transitions before, but not without investors having to stomach volatility along the way. Whenever I’ve talked about Microsoft, I’ve noted that it would be my “one stock” if I was forced to pick just one.

My view on that hasn’t changed, even if their ability to thrive in the AI era is anything but a foregone conclusion. There are clearly reasons to be worried and I’m not buying the current dip in the stock. I’ve chosen a different sell-off to get behind, but more on that later.

Read:
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If we look at Amazon and that wild capex announcement, the market sent a strong negative message with an 11% drop in the share price [during] after-hours trading. This puts Amazon at a level nearly 24% lower than the 52-week high, trading back at July 2024 levels.

This isn’t to say that the market is terrified of every AI story.

Alphabet, the holding company of Google, is putting out great numbers right now in cloud growth, with the share price having decoupled dramatically from the likes of Amazon.

I got this one completely wrong and missed out …

I didn’t think that Alphabet would manage the journey from keyword searching to AI searching quite as elegantly as it has.

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I’m hearing an increasing number of people using Gemini rather than ChatGPT and Copilot, so Alphabet is doing well right now.

If you draw a one-year chart of Alphabet and Amazon, you’ll see that they were almost perfectly correlated from February 2025 to August 2025. Then things went a little crazy, with Amazon heading sideways and Alphabet taking a rocket to the moon.

Before this latest after-hours drop, Amazon was down 7% over 12 months and Alphabet was up 71%. When you consider the amount of attention and equity research these stocks attract, it’s incredible that you can still see moves like these.

As mentioned earlier, the one that stings is Microsoft. It was doing incredibly well until the past few months, but the company is now down 5% over the past year.

The market isn’t enjoying Microsoft’s transition from a great cloud software business with recurring income to an infrastructure play with immense capex, lumpy income and deteriorating margins.

This situation in AI reminds me of the early days of streaming, where capex was flying out the door and it wasn’t clear what the steady-state economics would look like, or who the big winner would be.

And, incredibly, Netflix in its current form reminds me of Microsoft a couple of years ago, with a dependable business that generates cash and offers strong growth!

For this reason, the dip I’ve bought in the past week isn’t Microsoft or Amazon. No, I’ve bought Netflix, marking my entry into the stock for the first time.

Read:
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An angry market creates opportunities

Netflix is down 20% in the past year. The stock is trading at 52-week lows and in line with important support levels from 2024.

If it breaks lower, then it’s quite likely that there’s another 10% to 15% of pain to come. And if that happens, you can be sure that I’ll be buying more.

What gives me this confidence?

Well, if you look at Netflix’s business, they are in the best shape they’ve ever been in.

After a land grab strategy in streaming that looked a lot like what we are now seeing in AI, Netflix emerged as the best of the pure-play streamers with paid membership models.

Sure, there are still big fish in the water in the form of Apple and Amazon, but you can’t invest in those streaming businesses directly.

Netflix’s distribution means they are attracting top talent to their in-house content projects. Stranger Things, Frankenstein – you know the drill. I was very nervous of the content strategy a few years ago, but they’ve proven me wrong.

There is another competitor that is worth paying serious attention to though, even if the business model has important differences.

YouTube is going from strength to strength, with the Alphabet-owned platform doing an incredible job of turning amateur community content into a gold mine.

At this stage, I think Netflix is lucky that Alphabet would rather spend billions on cloud infrastructure instead of content production.

Having said that, the community feel of YouTube makes it a unique business, so perhaps Alphabet won’t deviate from that. This would give Netflix space to build the best global streaming business that focuses on professional content.

I would argue that they’ve done that already – so why is the Netflix share price down? And why so much?

The market doesn’t like the deal to acquire Warner Bros and HBO out of Warner Bros Discovery. The equity value on that all-cash deal is around $72 billion. Netflix has shed 35% of its market cap since the deal rumours started, or over $180 billion in market cap.

Is the deal a foregone conclusion? No, not by a long shot.

Listen: Netflix: Warner deal adds unnecessary risk

Although President Trump has said that he won’t get involved here, Netflix is still up against Paramount Skydance, backed by the Ellison family of Oracle fame.

Even more than that, Netflix is up against a regulatory hurdle of the highest order in the US, as this deal would give Netflix a commanding vertically integrated position in the market.

If the deal fails, then I’m betting that the share price regains much of its lost ground. It lost more than twice the value of the deal, so that seems like a relatively safe bet.

Read:
How Netflix beat Paramount to win over Warner Bros
Warner Bros’s bidders brace for a fight that will last months
DStv subscribers score as Canal+’s Warner Bros Discovery bluff pays off

If the deal goes through, I’m betting that the market has overreacted and is underestimating the value to Netflix of having access to even better content. They already have incredible distribution power, so more content can only make it better in my mind.

I don’t think the volatility is over in these tech names. Not by a long shot.

But if there’s one thing we know from finance theory, it’s that risk is what creates the opportunity for reward. I’m happy to finally have Netflix in my portfolio at a price that I wouldn’t describe as a bargain, but is certainly a lot more palatable than anything we’ve seen recently.

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