Important information: 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.
One key thing we’ve learned this year is that the coronavirus pandemic has accelerated existing trends. We were already shopping more and more online, now It’s become the default option. Working from home might have been allowed occasionally, now it’s commonplace, as employees and employers discover the mutual benefits.
And of course in the midst of full lockdown when the options for entertainment were limited, more and more of us turned to online streaming services such as Netflix.
It might come as a surprise then that Netflix’s second quarter results, released last night, disappointed investors.
Shares in the global streaming giant, fell initially 12% in after-hours trading on the back of weaker than expected results. So what caused the fall?
Over the last quarter Netflix has seen an increase in new sign-ups, adding 10 million subscribers in the three months to July. That’s certainly impressive growth, considering the company gained 2.7 million new subscribers in the same quarter last year.
But what has spooked investors is a warning that subscriber growth will slow. In a letter to shareholders the company said: “We expect less growth for the second half of 2020 compared to the prior year”.
Stock markets are always forward thinking and despite new subscriber growth and profits rising to $720 million in the quarter (up from $271 million a year ago), Netflix faces a number of challenges.
Firstly, while we may be spending more time at home we still only have a finite amount of time to consume entertainment. Consider the growth of the video-sharing app TikTok with its 800 million active users worldwide. Its users spend an average of 52 minutes per day on the app.1
Hours spent watching videos on your phone are hours that could have been spent on other platforms such as Facebook, Netflix or YouTube. All these companies are vying for our valuable time and the competition is tough.
Then of course to remain relevant and popular Netflix needs a steady flow of new content. Lockdown restrictions around the world have slowed this down and, in some cases, stopped it altogether as producers seek new ways to introduce social distancing on a film set.
Since the coronavirus-led sell-off earlier this year, Big Tech has powered the stock market rebound, pushing the US tech-heavy Nasdaq index to new highs. The so-called FAANG stocks - Facebook, Amazon, Apple, Netflix and Google-owner Alphabet have led the charge.
Technology has helped make lockdown more bearable, allowing us to stay connected with our friends, family and work colleagues, as well as shop and stream online.
While not explicitly part of the FAANGs club, Tesla shares have hit new highs this week causing some commentators to question whether the share price of the car maker, now with a market cap more than five times that of General Motors, has cruised into bubble territory. While opportunities abound for brave investors looking to pick up cheap shares in the sectors most hit by Covid, such as travel, retail and hospitality, investors will be questioning whether these valuations can still be justified.
As always it pays to be diversified and regularly check under the bonnet of your fund holdings. Take a look at the top 10 holdings of your funds, do the same companies or sectors appear again and again? Are you too exposed to a particular geographical region or sector that might turn out of favour?
With second quarter earnings season now in full swing we can expect further updates over the coming days on how companies have fared in a tough quarter of coronavirus lockdown. There will be winners and losers and as seen with Netflix, investors will be looking ahead and judging whether a company’s share price really represents fair value when looking ahead to what promises to be a year full of further uncertainty.
1 BusinessofApps, 2019
Five year performance
|(%) As at 16 July||2015-2016||2016-2017||2017-2018||2018-2019||2019-2020|
Past performance is not a reliable indicator of future returns
Source: Refinitiv, total returns as at 16.7.20, in local currency
Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. 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. When you are thinking about investing in shares, it’s generally a good idea to consider holding them alongside other investments in a diversified portfolio of assets. Overseas investments will be affected by movements in currency exchange rates. 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.