Wall Street Breakfast: Streaming Sea Change

Apr. 21, 2022 7:31 AM ETNFLX, DIS, WBD, PARA, LGF.A, AMCX, FUBO, TSLA, META, UAL, CVNA, RAD, GOOG, GOOGL, QQQ, SPY34 Comments20 Likes
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Streaming sea change

Netflix (NFLX) lost more than a third of its value yesterday, shedding more than $50B in market capitalization as shares tumbled 35%.The last time the stock fell like that was nearly 18 years ago, on Oct. 15, 2004. Netflix (NFLX) stock slipped nearly 41% that day, all the way to a split-adjusted $1.47 from $2.49 the session before. It’s a staggering loss for a company that is an original FAANG stock, considered a bedrock of growth stocks.

Netflix (NFLX) lost a net 200,000 subscribers for the quarter and forecast that it would shed 2M more in the current quarter. That's launched talk of whether the company is saturating its total addressable market. On the earnings call the company seemed ready to throw a kitchen sink at the problem (including monetizing free-riding viewers and creating an ad-supported tier).

Quote: The results were a "sea change quarter" that "essentially conceded to every key point of the bear thesis," J.P. Morgan analyst Doug Anmuth said.

"The bigger factor is management’s acknowledgment of relatively high household penetration when including account sharing, increased competition, and COVID pull-forward giving way to fundamental weakness," Anmuth wrote in a note to clients. "We're moving to the sidelines as we look for greater confidence in restoring subscriber growth & reaccelerating revenue, while also increasing development velocity in account sharing and advertising,"

Go deeper into the changing landscape: The stumble in the long-time dominant force in streaming may open the door for competitors to take the lead. But Wall Street is cautious, with other major streaming stocks all tumbling yesterday.

Walt Disney (DIS), HBO Max parent Warner Bros. Discovery (WBD) and Paramount (PARA) all fell more than 5% yesterday. There was also downward pressure for some smaller streamers often named in merger and acquisition chatter, with Lions Gate Entertainment (LGF.A), AMC Networks (AMCX) and fuboTV (FUBO) sliding.

There have been three chapters in the Netflix saga, according to Rameez Tase, co-founder of Antenna Data, which tracks the subscription economy. In Chapter 1 Netflix disrupted TV, in Chapter 2 TV fought back and clawed back market share and in Chapter 3 TV eats its own profits because hurting Netflix isn’t a business model, Tase tweeted.

“Yes, they weakened Netflix … but at what cost?” he said. “Each of Netflix's competitors now faces 2 existential challenges: retention and monetization. Will they be able to prevent churn? Will they be able to charge more?”

“The implications? Get ready to see an all-out war for retention and monetization, prices are going up, up, up, (but) will consumers bear it? Wall Street shifts from Subscribers to Customer Lifetime Value (and) Growth Marketers are the new saviors of TV.” (115 comments)

Tesla margins impress

Tesla (TSLA) is rallying premarket after powering through supply chain issues and late-quarter disruption in Shanghai to comfortably top estimates with its Q1 earnings report.

The company generated $3.3B in GAAP net income during the quarter and $3.7B in non-GAAP net income. The automaker reports it produced 305,407 vehicles in Q1 (+69% Y/Y) and delivered 310,048 vehicles (+68%).

Operating margin shot up to 19.2% of sales to improve from last quarter's mark of 14.7%. Automotive gross margin excluding regulatory credits was 30.0% vs. 27.7% consensus and 29.2% last quarter.

Tesla said it plans to grow its manufacturing capacity as quickly as possible and reiterated that over a multi-year horizon, it expects to achieve 50% average annual growth in vehicle deliveries. (125 comments)

Beige book

U.S. economic activity has expanded at a "moderate" rate since mid-February amid strong inflationary pressures, according to the Federal Reserve's Beige Book.

Strong demand but limited supply: Manufacturing activity was solid for most Fed districts, though supply chain disruptions, a tight labor market and higher input costs continue to put pressure on firms' abilities to meet demand.

As real (inflation-adjusted) disposable income growth contracts to record lows, some Fed contacts noted "early signs that the strong pace of wage growth had begun to slow," the Beige Book said.

Consumer spending accelerated among retail and non-financial firms, as businesses passed down higher input costs. For prices, "inflationary pressures remained strong since the last report, with firms continuing to pass swiftly rising input costs through to customers." (2 comments)

Ackman abandons ship

Bill Ackman sold his large stake in Netflix (NFLX) after the company reported a surprise drop in subscribers and looked to tilt toward an ad-supported service.

The fund manager said in a letter to investors that he decided to sell the shares, and take a big loss in the process, instead of sticking with a company where he has lost confidence to predict its future.

Pershing Square lost about $435M on its 3.1B share stake in the company, based on Wednesday's closing price, according to Bloomberg.

"While we have a high regard for Netflix’s management and the remarkable company they have built, in light of the enormous operating leverage inherent in the company’s business model, changes in the company’s future subscriber growth can have an outsized impact on our estimate of intrinsic value," Ackman said in the letter. "In our original analysis, we viewed this operating leverage favorably due to our long term growth expectations for the company." (155 comments)

Meta weakness

Meta Platforms (FB) saw sharp selling yesterday as chatter around the company came in reaction to a negative note from Cleveland Research, whose channel checks indicate that current-quarter business has tanked.

The firm has apparently cut its estimates well below Street consensus, based on a slowdown in everything from its e-commerce efforts to a breakdown in its targeting to share loss to rivals.

The first quarter looks weak and April's to-date business is slowing even more than that, the firm notes. Advertiser return on investment is weaker from inflation in CPM rates, a drop in conversion rates, and targeting changes - and nearly half of the agencies are set to miss their ROI goal, Cleveland says. (103 comments)

Today's Market

In Asia, Japan +1.23%. Hong Kong -1.25%. China -2.26%. India +1.58%.
In Europe, at midday, London -0.02%. Paris +1.45%. Frankfurt +1.18%.
Futures at 6:20, Dow +0.58%. S&P +0.77%. Nasdaq +1.07%. Crude +1.16% to $103.38. Gold -0.43% to $1947.20. Bitcoin +0.53% to $41,788.
Ten-year Treasury Yield +3.7 bps to 2.873%.

Today's Economic Calendar

8:30 Initial Jobless Claims
8:30 Philly Fed Business Outlook
10:00 Leading Indicators
10:30 EIA Natural Gas Inventory
11:00 Jerome Powell Speech
12:30 PM Fed's Bullard: U.S. Economy and Monetary Policy
1:00 PM Jerome Powell Speech
4:30 PM Fed Balance Sheet

Companies reporting earnings today »

What else is happening...

Russia tests new ICBM.

Dept. of Justice files notice of appeal over federal transportation mask mandate.

United Airlines (UAL) lifts off on optimistic guidance.

Real rates on the 10-year hit positive territory for the first time since 2020.

Carvana (CVNA) crashes post-market on big profit miss.

‘Stop it’ with the takeover talk for Rite Aid (RAD), analyst says.

Atlanta Fed's Bostic sees healthcare, education as keys to supporting labor force.

Google (GOOG, GOOGL) receives second request from DOJ for planned purchase of Mandiant.

This article was written by

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