Yesterday night (UK time), after US markets had closed, streaming giant Netflix (Nasdaq: NFLX) came out with earnings figures that massively disappointed investors. How massively? The share price dropped 25%.
The big problem is that Netflix reported a fall in subscriber numbers for the first time in a decade. And there’s no sign that things are going to get easier. The share price has now fallen by almost half since peaking in mid-November last year.
There are lots of reasons why the sector is “facing headwinds” as analysts put it, or “in trouble” as normal people might say. In fact, my colleague Rupert is currently working on a more detailed piece about the streaming industry right now.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
But I wanted to take a quick look at what the reaction implies about the overall market “tone” – in other words, how investors are feeling about different types of stocks.
We’ve already noted a number of times that the bubble in “just cross your fingers and believe” stocks burst quite some time ago. That peaked back in February 2021, as a glance at the share price of Cathie Wood’s ARK ETF (which is quite literally a faith-based investment) will demonstrate. Companies with big ideas but no profits and often not even much by way of revenues are no longer popular with investors.
Those were the “longest duration” stocks you could get, and thus very sensitive to shifts in interest rates. (“Duration” is a term normally used in connection with bonds – the longer the duration, the further into the future the cash flows sit, which makes the asset’s value all the more sensitive to interest rate changes).
But it now looks as though the “build it and they will come” model is reaching the end of the line too. There’s far more to this than just the end of the pandemic. That certainly plays a part (is watching TV really your priority now that the sun is out and you might have a hope of going on holiday for the first time in two years?)
But there are deeper forces at play. With interest rates rising and inflation picking up, investors are becoming less patient – they literally can’t afford to be as patient as they were when interest rates were low and falling. As a business, if you can’t provide them with growing revenues, then you’d better provide them with growing profits.
What does that imply? I suspect it means that the likes of Netflix are going to have to concentrate on quality over quantity, on margins over revenue growth. Maybe spending on content will slow, with more going on specific shows. That might be bad news for the TV and film (“content creation”) industry which has enjoyed a boom as streaming services have chucked money at producing more content to attract subscribers.
On top of that, subscribers can expect to be charged more. And not just in this business – across all of those businesses that have been based on “build now, monetise later” models. There are a lot of these companies about. You could argue that this is the basic business model of online grocer Ocado, for example. It was also how Amazon grew to its current scale, although clearly the online behemoth started building an awful lot earlier than anyone else and is in a correspondingly better position now.
As far as the investors are concerned, the building phase is over – now it’s “later”. And woe betide any business that can’t make good on that promise of “monetising” the audience.
Anyway, the point is, growth for growth’s sake is out. Bear that in mind when you’re looking at your portfolio. If there are individual stocks or funds in there which are heavily built on growth without an eye to profitability, it might be time to reconsider.
-
What will the unravelling of US-China trade mean for the economy?What will a US-China decoupling mean for the global economy?
-
Scottish Mortgage: why we’re turning to private companies and China for exceptional returnsWhen it comes to delivering growth, Scottish Mortgage will stop at no end in its hunt for exceptional long-term returns - this includes China, unicorn companies and sectors such as space exploration
-
Halifax: House price slump continues as prices slide for the sixth consecutive monthUK house prices fell again in September as buyers returned, but the slowdown was not as fast as anticipated, latest Halifax data shows. Where are house prices falling the most?
-
Rents hit a record high - but is the opportunity for buy-to-let investors still strong?UK rent prices have hit a record high with the average hitting over £1,200 a month says Rightmove. Are there still opportunities in buy-to-let?
-
Pension savers turn to gold investmentsInvestors are racing to buy gold to protect their pensions from a stock market correction and high inflation, experts say
-
Where to find the best returns from student accommodationStudent accommodation can be a lucrative investment if you know where to look.
-
The world’s best bargain stocksSearching for bargain stocks with Alec Cutler of the Orbis Global Balanced Fund, who tells Andrew Van Sickle which sectors are being overlooked.
-
Revealed: the cheapest cities to own a home in BritainNew research reveals the cheapest cities to own a home, taking account of mortgage payments, utility bills and council tax
-
UK recession: How to protect your portfolioAs the UK recession is confirmed, we look at ways to protect your wealth.
-
Buy-to-let returns fall 59% amid higher mortgage ratesBuy-to-let returns are slumping as the cost of borrowing spirals.
