Netflix (NASDAQ: NFLX) shares have tumbled 30% YTD, similar to its tech brethren, who have by-in-large, been facing huge downward pressure. For interest sake, NFLX was down 37% from its all-time high in November 2021.
Two major events have eaten into the gains that NFLX made in 2021. The first is investor confidence waning in growth stocks in the face of looming interest rate rises. And the second has perhaps had a greater impact; a tepid earnings report.
Netflix shares experienced a significant sell-off two weeks ago, after releasing its Q4 2021 earnings report. The report noted that the pace at which Netflix is adding subscribers is slowing. Such a declaration typically spooks Netflix investors, who steadfastly hold the streaming platform still has plenty of room to grow and shrink its price-to-earnings ratio.
Before Netflix’s share price dipped by 30%, its PE ratio was ~60.0. As it stands, with Netflix trading at US $429.48 per share, its PE ratio is now ~38.0.
Typically shying away from doing so, Netflix has finally revealed that competition is hurting its subscriber growth. It is this admission that caught a lot of investors off guard.
In the past three years, Netflix has had to contend with a wave of competitors entering the streaming market, such as (in order of appearance) Apple TV+, Disney+, Peacock, HBO Max, and Paramount+.
The penultimate newcomer on the above list, the premium-placed HBO Max, has been the fastest-growing service of late, vastly outpacing Netflix and adding 73.8 million subscribers last year.
Similarly, Netflix is hurting from older streaming services increasing the appeal of their content libraries and raising investment in content creation. One such competitor, Amazon Prime, increased its spending on content by 41% to US $11 billion in 2020 from the previous year and have recently bid US $8.5 billion to acquire MGM studios and its content catalogue.
Will 2022 be the year that consumers start weaning off the numerous streaming services to which they are subscribed? As prices climb, this may be the likely outcome.
In this respect, Netflix may be on the back foot, having recently pushed its prices up to US $15.50 per month for its standard package. Netflix is now more expensive than the more ‘premium’ HBO Max at this price point.
One factor that could influence the price of Netflix shares over the year is whether their competition hikes their respective prices. For one, Disney+ might be expected to raise its prices before June, as its bargain pricing (introduced one year ago) becomes increasingly unsustainable. However, its attempt to hit ambitious growth targets may delay price hikes from the company.
If pricing over the different streaming services become more equitable, content becomes the deciding factor for consumers. Netflix, and Netflix’s share price, will be in a better position in this scenario as consumers by far prefer Netflix content over its competitors. As such, In 2021, even as competitors pumped funds into content creation, Netflix’s hosted 14 of the top 15 most popular TV shows and Movies.
Q3 earning season is currently underway, and most high-profile companies are delivering revenue beats. Yet, Q3 revenue is not the only thing investors are watching. Investors are interested in revenue growth, customer acquisition, and pace of growth alongside the balance sheet. Inflationary and supply chain pressures that may affect the outlook of reporting companies are an additional concern for investors.
Tesla's Q3, 2021 earnings were, once again, record-setting for the Company. The Company is increasing sales and has stated it is on track to "achieve 50% average annual growth in vehicle deliveries" at a time when chip shortages are hampering other automakers ability to do so. Improving gross margins (up to 30.5%) was also a significant factor in Tesla performance in Q3.
TSLA shares since earnings report:
The popularity of Netflix's series Squid Game hadn't completely filtered into the Company's finances at the time of its Q3, 2021 earnings report. Yet, Netflix delivered a favourable report, with revenue coming in on par and subscriber growth beating expectations. Squid Game IP is estimated to be worth $900 million to Netflix and should help boost its Q4 earnings, which typically get a seasonal bump anyway.
NFLX shares since earnings report:
Johnson & Johnson's Q3 earnings-per-share beat expectations, with revenue climbing 10.7% from the previous corresponding period. J&J increased its (bottom-end) revenue guidance for the full year from $93.8 billion - $94.6 billion to $94.1 billion to $94.6 billion. J&J noted that its Covid vaccine would be responsible for $2.5 billion at years end and $502 million of its Q3 revenue.
JNJ shares since earnings report:
PG beat revenue estimates, increasing sales revenue by 5% over the last quarter, but expects to fall short of 2020 revenue. The consumer goods Company also noted that rising producer costs, particularly as it relates to shipping and raw commodity prices, has already had and is going to continue to have a larger-than-anticipated effect on its earnings. In response, PG has begun raising the prices of some of its premium products as a quick remedy to help offset its rising costs.
PG shares since earnings report:
There are plenty more juicy earning reports due next week.
Large tech stocks have rebounded spectacularly in an environment where everyone is fully dependent on the wonders of the internet. The NASDAQ, which is heavily weighted to technology stocks, has outperformed the S&P 500 year to date by just under 14%, reaching an all-time high. Many analysts state that the market has been overstretched – with the Fed propping up the stock market and retail investors buying the dip. With regards to tech stocks, however, are these prices justified?
To keep it relatively simple, we’ll stick to the FANG stocks. If we take a look at their P/E Ratios over the past five years
We can see that Google and Netflix have historically traded at extremely bloated multiples, with Facebook and Apple trading at multiples relatively closer to earth. However, if we look at the current prices (as of 10th / 06 / 2020),
They are all currently trading below their average P/E ratio over the last 5 years. A bullish case could be made on the premise that if investors are consistently paying for their premiums even when their premiums were consistently questioned, would it not make sense that they have tentatively earned their bonus due to their ability to generate free cash flow during unprecedented times like these? If they were historically overpriced before the pandemic, would that suggest that they’re currently fairly priced? If we take it a step further – if they were priced reasonably due to their growth rate before the pandemic – would that suggest they’re currently underpriced?
With central banks lowering interest rates to 0, the search for yield has become short of impossible. Furthermore, treasuries have not performed as well as gold as the ballast for a typical portfolio. The cash position with the likes Facebook, Amazon, Microsoft, and Google are reaching heights even Berkshire Hathaway has not seen, with Microsoft also having the covenant Triple-A rating on their bonds. Their ability to generate revenue regardless of the conditions alongside fortress-like balance sheet solidify their position as a haven in many portfolios. In a world where interest rates are low, stocks like the Apples and Microsoft’s provide a chance at a positive yield dividend and capital appreciation.
PNC’s Financial Services Group, who amassed $14 Billion recently from the sale of its BlackRock stock, is waiting for valuations to cool off before putting their capital to use. Chief Executive Officer William Demchak stated that PNC “will be patient” and that “[the coronavirus] hasn’t begun to play out in our economy in terms of what the impacts are and what the opportunity set will be that comes out of it.”
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