Could dark clouds be forming over the US tech sector - and the US market in general - judging by the latest batch of earnings to come out of the sector?
With equity investors starting to get cramp, having been braced for a while now for the long overdue and anxiously anticipated end of the US market’s bull run, the likes of Netflix and Donald Trump certainly aren’t helping ease the pain.
Take Netflix. The 17 July 2019 will go down in its history-to-date as a record-setting day. But unfortunately in all the wrong ways.
Netflix shares closed down more than 10%, making it the worst one day fall in three years, and worse still, wiping $17 billion off its market value - marking in this case - its worst day ever.
They have been a stellar performer so far though, rising more than 35% since the start of this year and even now after the share price slide Netflix is still valued at around $142 billion.
But why the share price slump? Largely because of those subscriber numbers that came out after the market closed on Wednesday and fears about what it all means for the future of Netflix.
The figures showed new customer numbers were about 2.5 million short of Wall Street’s expectations. It did post better than-expected earnings, with its $4.92 billion in revenue essentially matching analysts’ expectations, but that didn’t soothe nerves at all.
The worry is that while revenues can be propped up by increasing subscription costs (as this shows) it can also lead to customers leaving (as this also shows). There are also concerns about saturation levels, with 60 million Americans already subscribed to Netflix.
After adding its latest overseas customers, Netflix now has 151.6 million global subscribers. But 126,000 customers in the US, which is its biggest market, closed their accounts - the first time that has happened since 2011 - and only 2.7 million new customers signed up during the second quarter under review, and this is what the market is focusing on.
Netflix chief executive Reed Hastings may argue that his company is a media group not a technology one, but it’s safe to say that investors have viewed it as a high-growth tech company, giving it a market cap of about $157 billion on annual revenue of $15.8 billion and net income of $1.2 billion in 2018. Especially when you compare it with Disney, which, the same year, was valued at roughly $169 billion on annual revenue of $59.4 billion and net income of $12.6 billion.
Technology stocks had been deemed particularly vulnerable to a drop in earnings, with analysts estimating that earnings per share at tech companies could shrink by just over 7% on average, compared to the second quarter last year, according to Credit Suisse.
Then there’s the US materials sector and this is where Donald Trump comes in. Having told reporters at the White House the US still has a long way to go before reaching a trade accord with China. And adding in that Washington could impose tariffs on another $325 billion in Chinese goods if it chooses to, sent the S&P 500 down as much as 0.4%.
With the materials sector most sensitive to China and the fallout from the ongoing trade war between Washington and Beijing, analysts expect companies in this sector to have had an even worse second quarter.
According to Factset, a US financial data analysis group, the sector is projected to report a 16% fall in year-on-year earnings and a 14.9% drop in revenues. Tech is close behind, with expectations for an 11.9% fall in earnings and a 1.1% drop in revenues.
Of course, as always where there are winners there are losers and in Netflix’s case, a raft of hungry competitors are on hand to snap up its erstwhile subscribers. Knowing where to invest is the trick and where taking a fund-based approach can work best in times of uncertainty.
As well as Fidelity’s Select 50 Balanced Fund, which takes a global approach to finding long-term winners in the world’s markets, our Select 50 list of preferred funds has five funds focused solely on the US.
Tech and media are usually key holdings, which means you won’t miss out on these potentially lucrative sectors, but with the expertise of an experienced fund manager at the helm, you can steer clear of the stocks to avoid.
Five year performance
As at 18 July
Past performance is not a reliable indicator of future returns
Source: Refinitiv, as at 18.7.19, in local currency terms with income reinvested
The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.