Stocks

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 ~$2 billion in free cash flow for 2022 and a significant increase in 2023 (we project ~$2.2Bn). This healthy projected increase in cash flow is due to management reigning in content spend to ~$17 billion 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 multiple 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.

We reiterate our BUY rating for Nike, albeit underweight, because of these caveats: i) the looming recessionary environment, ii) continuing supply-chain woes alongside China’s zero-covid policy and iii) elevated freight costs. We reiterate our view that Nike is a hugely valuable brand with recognition similar to Apple and Coca-Cola, however we caution against too much optimism in the next few quarters as we expect the company to continue to be impacted by the issues we have mentioned.

Amazon shares popped after delivering better-than-expected second-quarter earnings, following a weak result from Walmart and Meta earlier in the week which had set expectations low for Amazon’s e-commerce and advertising businesses. The stock ended up recovering strongly after hitting a 2-year low in June, as sentiment on the stock continues to shift more favourably post result.

Note, Amazon undertook a 20-for-1 stock on 27 May 2022

Unlike its mega-cap peers, Amazon is not as profitable as it continues to invest heavily into its wide array of business, and its core e-commerce business operates at lower margins (and delivers a loss on certain quarters) as it faces short-term headwinds. This is not a new approach, with Amazon continuing its long-term practice of sacrificing profits when it sees opportunities to improve service to its customers, growing top-line revenue aggressively, to later focusing on widening margins with bigger scale.

Amazon has been reliant on Amazon Webservice Services (AWS) to drive profitability and is still forecasted to achieve solid ~30% over the medium term. Two other segments to note is the Subscription services and Advertising, the later managing to outperform major advertising peers and a space to watch.

We believe Amazon is a great company and while its core e-commerce business will be stagnant, it is key to being supplemental to its other growth business units. We maintain a BUY (High-Risk) rating on Amazon rating due to its growing tech businesses (AWS, Subscription and Advertising). We believe Amazon will continue to grow from strength to strength over the long-term as it expands its products and services.  however, the share price is still more prone to market sentiment near-term particularity towards its e-commerce business more prone to softening in a slowing economic environment – for that reason it comes with a high-risk rating.

We reaffirm our BUY rating for Microsoft, Inc. In the face of significant economic slowdown the company grew revenue by +16% (decelerated by 5 points compared to last quarter) and earnings per share by +3%, to $2.23 per share.

We reiterate our BUY rating for Alphabet Inc, the parent company of Google. The company reported search figures in-line with expectations, whilst their cloud business exceeded US$6 billion in quarterly revenues for the first time. Slowing growth in the YouTube segment continues to be of concern, with revenues decelerating for the second quarter in a row. We do however note this is consummate with slowing ad spend on comparative platforms (Pinterest, Snapchat, Twitter) which rely strongly on user-generated content. Search remains the ‘crown jewel’ of Alphabet and continues to account for the bulk of revenue. We consider this to be a defensive and compelling characteristic of Alphabet, as it is highly predictable and continues to be unaffected by secular trends. Search grew ~17%, ahead of industry consensus of ~12%.