Awaiting Inflation Data | Netflix to Underperform

10 August 2022

Global markets were lower overnight, as US markets (S&P 500 Index -0.4%) fell for a third day in a row as investors brace for much anticipated US inflation data for the month of July.

The NASDAQ tech index fell -1.2%, following a bunch of weak earnings, with tech and consumer discretionary stocks weighing down on the broader market. Micron, Novavax and Upstart all warned that future earnings and revenue may come in lower than previously thought as economic headwinds pick up.

European Markets (Stoxx 600 Index -0.6%) fell as heavy losses from tech stocks weighed down on the rest of the market, partially offset by a rise in oil and gas stocks.

Netflix (NFLX:NASDAQ)



Netflix shares have traded higher after it posted better than expected result, losing ‘only’ 1 million subscribers, doing better than management’s guidance of a 2 million subscriber loss. While an early disruptor in the sector, and a huge benefactor from covid lowdown, these tailwinds are quickly waning and competition is intensifying.

The company expects ~$2Bn in free cash flow for ‘22 and a significant increase in ‘23 (we project ~$2.2Bn). This healthy projected increase in cash flow is due to management reigning in content spend to ~$17Bn annually, as the “content wars” slow down. We think investors should be breathing a sigh of relief on this news.

However, we view Netflix as a content company with a web platform. Netflix trades at ~19x forward earnings whilst Paramount and WarnerDiscovery can be purchased for ~7x earnings. Additionally, Netflix is hampered by a lack of a content library — both WarnerDiscovery and Paramount have extensive libraries going back decades, with solid franchises such as Star Trek, DC, etc. Netflix either needs to pay for content libraries or constantly generate new shows and movies. This puts Neflix at a constant disadvantage, and its previous advantage — scale — has been eroded as more consumers switch or add other services. Paramount+ added 4.9 million subscribers in this last quarter, and WarnerDiscovery added 1.7 million subscribers, bringing its total streaming audience to ~92.1 million. Netflix’s scale is no longer enough of a ‘moat’.

We downgrade NFLX from a HOLD to Under-weight.

Australia & New Zealand Market Movers
There was a rally in ASX green energy commodity stocks yesterday, with lithium, copper and renewable energy stocks up strongly buoyed by BHP’s rejected takeover bid on Oz Minerals.

National Australia Bank (NAB) shares dropped -2.9%, despite third quarter profits rising +6%, as net interest margins slipped slightly.

The New Zealand market (NZX 50 Index, +0.4%) was up on another quiet day of trade.
Metro Performance Glass ended the day flat, after announcing builders are expected to pay more for glass on the back of cost inflation for raw imported materials.
Fletcher building slipped despite revealing it has made progress in ramping up plasterboard production and expects to meet market demand by October, partially helped by a slowdown in demand over winter.

3 Things Markets will be Watching this Week

– US and China inflation (CPI) data will be the major news of interest
– US earnings continues now towards the backend.
– Locally, Australian earnings kick off with the financial sector, Suncorp, NAB, CBA, AMP and QBE due to report this week as well as Telstra and ResMed.

Global markets were lower overnight, as US markets (S&P 500 Index -0.4%) fell for a third day in a row as investors brace for much anticipated US inflation data for the month of July.

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