By Giles Coghlan, Chief Currency Analyst, HYCM
At earnings of $3.53 per share, it actually surpassed many analysts’ forecasts, and although revenues fell slightly short of expectations, at $7.87 billion, the company still saw year-over-year growth. The over 25% decline the stock suffered has been attributed to the company losing subscribers for the first time in a decade.
Netflix reported a loss of 200,000 subscribers when Wall Street was expecting a subscriber count build of around 2 million. Even factoring in the lost subscribers due to its withdrawal from the Russian market, it still found itself significantly short of Wall Street’s expectations.
Much of the subsequent discussion has focused on the company’s acquisition strategy, increased competition from rival streaming services, as well as the problem it has with account credentials being shared. But perhaps Netflix price action is also reflecting the pricing-in of a broader tightening of financial conditions as investors (and indeed Netflix subscribers) prepare for leaner times ahead.
The Consequences of Tightening
Netflix belongs to a segment that’s already feeling this pinch from the ground up. Households have been cutting what they regard as non-essential costs as they contend with rising inflation and an uncertain economy ahead. A recent study revealed that the number of UK households that subscribe to at least one streaming service fell in Q1, with over 1.51 million subscriptions being cancelled over the quarter.
There’s an obvious top-down parallel to be drawn here, and it’s that companies like Netflix are also the first to go from investor portfolios when financial conditions start to tighten. High beta tech stocks with high price-to-earnings ratios that don’t have the cash to pay dividends; these tend to outperform when financial conditions are loose. When, on the other hand, conditions tighten and interest rates are on the rise, they start to seem expensive and the opportunity cost of not receiving a yield causes investors to look elsewhere.
Don’t Forget the FED
Former New York Fed president, Bill Dudley, recently published a Bloomberg opinion piece titled: “If Stocks Don’t Fall, the Fed Needs to Force Them.” Elsewhere, we at HYCM have posed the question of whether the Fed would prefer a recession over continued asset inflation. If you’ve been following the change in tone coming from the Fed, it would seem they at least want markets to believe that they will risk shocking them in order to get inflation under control.
Why bring the Federal Reserve into a discussion about Netflix? Because Netflix kicks off a tech earnings season that will see Microsoft and Google on the 26th, and Apple and Facebook on the 27th. At the very least, this introduces an interesting dynamic to the price action following these releases.
US stocks are playing a game of hide and seek with the Fed, in which it keeps signaling that it’s more hawkish than stock markets and long term bonds have priced-in. Perhaps a bumper earnings season is precisely what equity investors don’t need right now. This is because, counter-intuitively, a series of positive earnings surprises, could ultimately hasten a negative policy surprise.
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