Netflix shocks the market, FTSE 100 year-to-date gains wiped out, and Restaurant Group delivers good news

Netflix

“When Netflix released Don’t Look Up, was it trying to second guess what would happen when its fourth quarter numbers came out? The share price is doing exactly what was instructed by that film title – it’s looking down to the tune of a 20% decline in after-hours trading,” says Danni Hewson, Financial Analyst at AJ Bell.

“Fourth quarter earnings were well ahead of forecast and 8.3 million net new subscribers were better than the market consensus of 8.1 million, albeit less than the 8.5 million guided by Netflix.

“Yet the big news was guidance for subscriber growth to slow massively, which therefore drags down earnings expectations and puts a question mark over Netflix’s goal to be cash flow positive every year from 2022.

“Netflix spends a massive amount of money on content to attract and keep viewers, so essentially as soon as those subscription payments come in, they’re out the door again to pay for big TV and film productions. Basic business sense means it must bring in more money than is being paid out, but film financing is not straightforward and there are always lots of moving parts.

“The pandemic essentially brought forward a lot of subscriber growth, so Netflix must now face the reality that earnings growth is becoming more dependent on regularly raising prices, not simply hoovering up millions of more subscribers every month.

“In 2017 Netflix’s co-CEO Reed Hastings brushed aside talk that rival streaming providers would come and catch up with it, saying ‘we compete with sleep and we’re winning.’ Those words have come back to haunt him.

“The streaming market is now very competitive and in some markets like North America growth is becoming much harder to achieve because so many people are already signed up to Netflix and a host of other platforms.

“A lot of new subscribers are now coming from outside the US and Canada, with Asia Pacific a key region for growth – however, the average revenue per member for Netflix in these places is a lot less than North America.

“It looks Netflix might have to load up a new spreadsheet and start redoing its maths to see what the long-term earnings model might look like if growth expectations are significantly pared back.”

Markets

“Anyone who put money into the stock market for the first time during the pandemic might have thought investing was easy, with share prices shooting upwards daily. January 2022 has been that nasty wake-up call that stocks and shares can go down as well as up.

“The week ends on a sour note, with most of the main stock indices across Asia and Europe in the red.

“After bucking the sell-off seen among US stocks in recent sessions, the FTSE 100 has now stumbled and lost all its year-to-date gains.

“Only eight FTSE 100 stocks were in positive territory on Friday, and these were typical places that investors (and the general public) hide when everything looks glum including headache tablets (Reckitt Benckiser) and cigarettes (British American Tobacco).”

Restaurant Group

“It is pretty heroic for Restaurant Group to be guiding for earnings at the top end of expectations given all the challenges currently facing it.

“The impact of Omicron disruption was evident in a slowdown in December but when it comes to the things Restaurant Group has been able to control it has done a decent job – perhaps most notably keeping a tight rein on costs at a time of rapid wage and input cost inflation.

“What will be particularly pleasing for investors is the fact that the leisure division, centred around entertainment venues, is doing well when historically this part of the business has really struggled.

“It suggests the restructuring of this part of the business, which includes chains like Frankie & Benny’s and Chiquito, is paying off.

“The jewel in the crown is still Wagamama. While its acquisition in 2018 was widely seen as over-priced at the time, owning it has been priceless for Restaurant Group given the strength of the brand. You dread to think how it might have coped in the pandemic without it.

“All areas of the business are continuing to outperform the wider market and the company might well need to keep this up if it is going to continue to thrive against the backdrop of a cost of living crisis. This will put pressure on household budgets and likely reduce appetite for eating out.

“More positively the lifting of restrictions and the opening up of travel again, which would boost its airport-based concessions, could provide the business with a tailwind.”

These articles are for information purposes only and are not a personal recommendation or advice.