Head of Equity Strategy
Summary: Netflix's decade of uninterrupted growth came to a halt in Q1 as the company lost 200K subscribers and to make things worse Netflix is estimating to loss another 2mn paying subscribers in Q2 as competition is heating up and inflation is potentially putting pressure on households to cut down on less essential things. We take a look at the four drivers that Netflix can tap into to get back on the growth track. In today's equity update we also take a look at ASML earnings which are showing investors that demand is still very strong for semiconductors but the risks in the industry has gone up dramatically because of the war in Ukraine.
Netflix shares tumble 26% on Q2 outlook
Netflix has been this unstoppable growth train for over a decade but that ended in Q1 2022 with the video streaming company losing 200K paying subscribers (the chart below does not include the Q1 2022 figure). Even if we factor out the 700K loss from Russia it was a big miss against its own guidance of adding 2.5mn. In addition, Netflix is guiding a loss of 2mn paying subscribers in Q2 vs estimates of +2.5mn. The market got spooked sending Netflix shares down 26% in extended trading and to levels 65% below the recent all-time high back in late 2021.
What does that tell us about Netflix and sell-side analysts? It says that both analysts and the company itself have difficulties understanding the post-pandemic demand picture and especially the competitive landscape that is changing with e-sports and gaming, but also the impact from higher inflation. While some households can substitute into lower priced consumer goods when facing inflation the video streaming services are all priced at the same level and are offering the same product, so substitution does not happen. Cancellation is more likely the outcome of inflation.
So what are the drivers that can pull Netflix back to an interesting growth trajectory?
ASML Q1 result calms investors
The semiconductor industry has had a tough 2022 with our semiconductors theme basket down 24% this year and down 9% alone this month. Rising interest rates have impacted lofty equity valuations and the war in Ukraine has caused a major operational risk to the industry as the majority of the world’s production of neon gas is produced in Ukraine. In addition logistical problems in the global supply chain and rising raw material prices are putting pressure on semiconductor profitability.
This morning ASML, the world’s leader in ultraviolet lithography machines for the semiconductor industry, reported what looks like bad figures but the majority of the miss is due to timing issues related to revenue recognition which is a function of delivery issues due to logistics bottlenecks. Overall, ASML says demand remains very strong and far exceeding the current production capacity.
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Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Uncover the shifting focus in 2024's FX markets towards growth resilience and relativity, away from bond yields and inflation stories.
Embrace the metal revolution on the commodity market in the coming year, with a focus on gold, silver, platinum, copper, and aluminum.
The gloominess of geopolitical conflicts and the repetitive nature of political agendas. What else does 2024 hold in store for us?
The disheartening cycle of unresolved geopolitical conflicts, the rise of polarizing political parties, and the stagnation of productivity.
Understand China's political landscape in Q4 2023 and the impact on counter-cyclical initiatives, with a focus on the pivotal Q1 2024.
