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Netflix fears Fortnite more than Amazon

Emma-Lou Montgomery

Emma-Lou Montgomery - Fidelity Personal Investing

A bit like when you’re at a job interview and you’re asked what your worst trait is and you wheel out a positive negative, so Netflix has done similarly in its latest earnings report.

Forget Disney and even Amazon, we’ve got our eye on the likes of Fortnite and YouTube, it said in a letter to shareholders.

“We compete with (and lose to) Fortnite more than HBO. When YouTube went down globally for a few minutes in October, our viewing and signups spiked for that time.

“Our focus is not on Disney+, Amazon or others, but on how we can improve our experience for our members.”

It’s effectively telling shareholders to stop worrying about the usual suspects (and dismissing the scaremongers who perpetually say Netflix will only stay on top as long as the likes of Friends and The Office are part of its offering) because it, Netflix, already has the future under control and it’s looking at competition that shareholders - and analysts - haven’t even caught on to yet.

That’s presumably - and most likely - had a soothing effect on shareholders. It knows it can’t realistically convince anyone it’s completely immune to all competition, so its thrown a curveball and in one fell swoop allayed fears and yet come across as open and honest, again. And this is a time when honest reporting is critical.

The numbers themselves are solid enough, beating earnings per share (EPS) estimates but falling just below them in terms of revenue, which came in at $4.19 billion in the fourth quarter, against consensus estimates of $4.21 billion.

It’s also said that results in the first quarter of this year are likely to come in lower-than-expected. Netflix expects earnings per share of 56 cents on the back of revenue of $4.49 billion. That compares with analysts’ consensus forecasts of around $4.61 billion in revenue and EPS of 82 cents.

One issue it couldn’t side-step was its cash flow - or rather, lack of. Owning up to debts of $1.3 billion it said it expects the $3 billion it borrowed in 2018 to remain the same in 2019. After that it said cash flow would improve.

Netflix has made no secret of the fact that it’s had to spend to generate original content and that’s not likely to change in the next year, but it’s certainly working when it comes to pulling in the punters. It beat subscriber number forecasts both in the US and internationally, adding 8.8 million paid memberships worldwide in the fourth quarter. The company added 1.5 million new subscribers in the US and 7.3 million internationally. Free trials accounted for 9 million global memberships during the fourth quarter.

While Netflix’ earnings are important for shareholders, this announcement also kicks off the fourth quarter reporting season for all the so-called FAANG stocks (Facebook, Apple, Amazon, Netflix and Google-owner Alphabet).

Sector-watchers will be poring over the Netflix numbers and looking closely at what the other tech giants have to say.

Shareholders, who have seen their shares rise around 30% since the start of 2019, have been richly rewarded and according to a report in Barron’s they could have further to go.

Citing research from Bespoke, the magazine said investors often react strongly to Netflix earnings announcements, particularly the year-ending ones. It found that while Netflix shares have fallen, on average, in the trading days after its first quarter, second quarter and third quarter reports, its fourth quarter announcement has tended to prompt average gains of more than 12%.

Technology companies feature in our Select 50 selection of recommended funds but more usually as part of a wider portfolio, which often includes more defensive stocks to provide some balance. The Rathbone Global Opportunities Fund for example features Amazon in its top 10 holdings, but also Visa and Mastercard as more defensive plays.

Similarly the Fidelity Global Special Situations Fund has Google-owner Alphabet in its top 10 alongside Shell, while the Fidelity American Special Situations Fund has completely shunned the FAANGs altogether in favour of what could be described as “older tech stocks” such as Oracle, Cisco and Verizon.

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