“The Lord gave and the Lord hath taken away,” is a famous line from the King James version of the Book of Job. This year it’ll equally apply to a number of well-known equities.
The Coronavirus pandemic proved a once-in-a-generation tailwind for a select group of businesses. Whether you were an online goods specialist, a video conferencing company or a seller of high-end home office furniture, the instant transition to a working-from-home world created the sort of consumer demand that was unthinkable just months before.
As restrictions ease and inoculation rates soar, for the likes of Peloton, Ocado and Zoom, the question has now changed to one of sustainability. Did the pandemic simply pull forward two to three years of demand? Or has it reshaped each industry so much that growth will consistently be higher going forward?
Last night, we got our first real answer.
Netflix reported its first quarter earnings, and it missed by a margin on its expected subscriber numbers. Here’s the FT take:
Estimates for subscribers was 6.4m, according to CNBC. While second quarter subscriber guidance was even weaker, with the Californian company estimating that it might add only 1m customers, versus estimates or 4.6m.
Even the usually unflappable chief executive and founder Reed Hastings seemed a bit skittish about the numbers on the ensuing conference call, telling Fidelity’s Nidhi Gupta, “we had those 10 years where we're growing smooth as silk”, before adding that the streaming service was “just a little wobbly right now.”
Judging from the figures, it looks like 2020’s subscriber surge was more a one-off than the new normal. Of particular concern is its Latin American business, where according to research shop MoffettNathanson, despite relatively low market penetration rates, Netflix expected “roughly flattish” growth in the second quarter.
The fundamentals were relatively good. Revenue came in just above estimates at $7.2bn, while net income was a full $1bn higher than the same period in 2020. Part of the profitability boost, of course, is to do with costs: delayed productions meant its content amortisation and related expenses grew slower than expected, boosting margins. The company expects this to continue in the first half of the year, due to “a lighter content slate” and “hence, we believe, slower membership growth”.
We’re also not sure stable revenues is what investors have signed up for, given the stock trades at a rather pricey 38 times forward Ebitda.
The link between Netflix’s largely junk-bond funded content spend and its subscriber numbers has been one of the focal points for those on both sides of the trade. The bull case has long been that, as it scales, Netflix can reduce its content spend while both maintaining subscriber numbers and raising prices. Revenue, margins and, therefore, profits will follow.
The bears, meanwhile, don’t believe in this conscious uncoupling between content and subscribers. Any attempt to take its foot off the content pedal will mean maintaining, let alone growing, subscribers becomes a serious challenge. This problem is potentially further exacerbated by Netflix chasing new markets like India, where not only are the revenues per subscriber lower, but tastes far more local. Bollywood content, it goes without saying, is far less fungible across markets than big budget drama like Stranger Things or The Crown. That’s not to mention competitive supply and demand pressures from the likes of streaming rivals Disney, ViacomCBS and Amazon.
Reading too much into a quarter is always an error, but given Netflix’s commentary about the ties between subscriber numbers and content spend, it’s not hard to think the bears might have got this one right. At pixel, Netflix’s shares are down 7.8 per cent to $507.
As for the other stay-at-home stocks? Well, it’s easy for people to say a bad quarter for Zoom, Wayfair and Ocado is “already priced in”. But, looking at the market reaction to Netflix’s results, we’re still not quite sure that’s the case.