☀️☕Netflix and… merge?

20 January 2023

🧧🐇💦Happy Friday, and Happy Chinese New Year for Sunday!🍊🍊(We will be back on Tuesday.)

US large-cap S&P 500 closed 0.76% DOWN 🔻 Tech-heavy Nasdaq Composite closed 0.96% DOWN 🔻 Pan European STOXX Europe 600 closed 1.48% DOWN 🔻 HK’s Hang Seng Index closed 0.12% DOWN 🔻 Japan’s Nikkei 225 closed 1.44% DOWN 🔻   

📊 In the Markets

Fewer people lose jobs. Wall Street is unhappyShein: Fast Money, Fast Fashion US Shutdown, US Default and Global Crisis? (Please, no!)This is (Price) War. Tesla cuts prices, recent buyers complain, sales shoot up

📝 Focus

Netflix and… merge?

📖   MoneyFitt Explains

🎓  Company Guidance

📊 In the Markets

Fewer people lose jobs. Wall Street is unhappy

Aaaaaaand we’re back. Wall Street once more treating what to normal people would be good news, as a reason to sell. This time it’s fewer people losing their jobs than expected. “Initial jobless claims” came in at 190,000 (for the week ending 14-Jan, which is based on claims for benefits, so you know they’re timely), which was a 15k drop from the previous week compared to Wall Street expectations of a 10k rise. The US labour market continues to be RED-HOT despite all the cooling measures and signs of slowing consumer spending last year. 

Fewer job losses upsets traders as it means that The Federal Reserve, the US central bank, may keep interest rates higher for longer (as they’ve been saying for months and months), for fear of a wage-price inflationary spiral… even though inflation at this stage seems to be led by companies protecting or boosting profit margins while they can. Lael Brainard, vice chair of the Fed, acknowledged this by referring to “the scope for margin compression” in the economy. 

An Axios report that an increasing share of Americans are spending more than they’re earning might explain some of the relative ease that companies have had in shovelling through price rises while consumers complain… but pay up. Massive excess savings built up over the pandemic (think stimmy checks and not going out) remains high, but consumers have burned through a chunk of it, and “spending beyond your means”–always a bad idea– could come to a shuddering halt when the savings run out.

Anyway, Brainard also said that interest rates need to remain high, even with signs inflation is easing off. More interestingly, she added that she saw “some reassurance that we are not currently experiencing a 1970s-style wage-price spiral” (in which higher wage costs keep pushing prices higher and prices keep pushing wages higher.)

“Inflation remains high, and policy will need to be sufficiently restrictive for some time… to get it back down to 2%. We are determined to stay the course,”

Yet Wall Street increased its bets from 50-50 to 55-45 that the Fed would cut rates in September (after two consecutive 0.25% hikes starting from 1-Feb.)

Shein: Fast Money, Fast Fashion

Shein, the cheaper-than-Zara, Singapore HQ-ed Chinese fast-fashion giant, is looking for US$1.5 to 3.0 billion from its existing investors, valuing it at US$64 billion, with a possible US IPO later in the year. The latest raise is almost a third off its previous round last April, which at the time made Shein the world’s third most valuable private company, behind TikTok owner ByteDance and Elon Musk’s SpaceX

An IPO would shine a spotlight on industry-wide fast fashion practices that Shein seems to have taken to extreme levels (perhaps accounting for its roaring success.) Besides environmental issues (waste, carbon emissions), fast fashion garments spark ethical concerns that were once (rightly) levelled at sneaker makers like Nike and Adidas. They are often made in sweatshops where underpaid workers are employed for long hours in unsafe conditions and are exposed to harmful chemicals used in textile production, To their credit (a bit), Shein did admit to many of these, though generally only after exposés, like the ones by UK TV shows trained on Primark.

Also interesting will be its move to become a platform for other retailers, its foray into payments and its move to spread its supply chain away from China.

US Shutdown, US Default and Global Crisis? (Please, no!)

The US government hit its $31.4 trillion borrowing limit on Thursday, which raises the possibility of a fiscal crisis in the middle of the year after the Treasury uses up its “extraordinary measures” to avoid default. The Republican Party, with a newly won and wafer-thin House majority, will do what it can to extract spending cuts from President Joe Biden and the Democratic-led Senate.

“Failure to meet the government’s obligations would cause irreparable harm to the U.S. economy, the livelihoods of all Americans and global financial stability”

Congress avoided a government shutdown (which would have stopped nonessential operations and left federal employees unpaid) by passing a spending bill last month to fund government operations until the end of the fiscal year on September 30. 

But a government default is something else: If the government is no longer able to borrow, due to hitting the debt ceiling, it would not have enough money to pay all its bills in full and on time – including interest on the accumulated national debt, so it would have to temporarily delay payments or default on some of its commitments, including paying interest on its bonds.

And that could be a global financial crisis all on its own.

This is (Price) War. Tesla cuts prices, recent buyers complain, sales shoot up

Almost exactly mirroring what happened in China, Tesla’s unexpected US price cuts, coming after earlier cuts and discounts, led to complaints from recent buyers and… ‘unprecedented demand.’ According to Electrek, Tesla’s stores are hitting sales records and inventory (the unsold cars) is flying off the forecourts. (In China, waiting lists almost immediately shot up.)

Basically, Tesla’s spending its production-cost advantage on price cuts that its peers will struggle to keep up with. 

Analysis by Reuters shows that thanks to premium pricing and lower costs coming from its scale, Tesla makes more money per vehicle than any of its global rivals. Tesla earned gross profits per vehicle over 2x, 4x and 5x what Volkswagen, Toyota and Ford did in the third quarter last year, respectively.

This positions it well in the electric vehicle price war that’s unfolding against not only legacy automakers like those but also the other EV companies out there, many of which have yet to turn a profit or have less cash in the war chest. Watch this space.

📝 Focus

Netflix and… merge?

Streaming has been painful for the earnings of Disney and Warner Bros. Discovery and all the other platforms trying to crash their way into the game Netflix pioneered after its pivot from DVD-by-mail to streaming 16 years ago this month… and a decade since launching its original programming initiative with “Game of Cards.”

Netflix, the first big tech name to report December quarter numbers, announced after market close that it had added 7.7 million subscribers, which was 70% higher than its own guidance 🎓 as well as what highly-paid Wall Street analysts were expecting, ending 2022 with 231 million worldwide. Netflix didn’t give a breakdown of how many were added thanks to the new ad-sponsored offering (or how many switched from the full rate) since it’s shifting its focus from subs growth toward revenue and rolling out paid sharing more broadly in 1Q, i.e. no more password sharing. (The Tweet below was from 2017.)

Love is sharing a password.

— Netflix (@netflix)
Mar 10, 2017

Analysts were even further off the mark with the earnings per share forecast of 45 cents, when it actually came in at 12 cents, though with their revenue forecast bang in line, it shows how much can happen between the money a company earns from customers and the money its shareholders get (in this case, the difference was largely because of FX effects). Despite the massive earnings “miss”, the stock bounced 7% in after-market trading, having dropped 3% during the day. 

Not, we believe, because founder and co-CEO Reed Hastings announced he’d be stepping and transitioning to executive chairman. Given the scale of competition (the average US household has FIVE streaming services!) and the bite that it’s taking from earnings, there could be some “consolidation” among the streamers (meaning that two or more may combine forces either by merging or by buying one another.) Even mighty Disney is feeling it — Disney+ not only costs a lot, but the licensing fees that the company gives up by NOT pushing out its content on Netflix and the like is really hurting… exactly as Bob Iger, the returning CEO, said as Disney+ was launching in late 2019: “We’re going to destroy our profits.”

Netflix, valued at US$140 billion, could be next on Microsoft’s big-ticket shopping list, Reuters suggested recently, particularly since they’re already Netflix’s ad-tech partner for the new ad-supported subs, and Microsoft President Brad Smith already sits on the Netflix board.

📖 MoneyFitt Explains

🎓 Company Guidance 

Companies sometimes give a heads-up forecast or pre-announcement to investors to help them understand their prospects better. Generally, they don’t want to surprise the stock market by too much, particularly if it’s a bad surprise as the share price could drop on the actual news… it’s sometimes called a “profit warning” (they don’t mind good surprises as much!) 

This is known as “guiding forecasts” for investors and brokers but it’s simply managing expectations. 

In practice, shares often move on guidance anyway. Guidance is just a forecast based on current conditions usually before the end of the period in question and can turn out to be wrong (though it is not allowed to be purposely misleading!)

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