As a publication, Venture Society is designed for people who are searching for a deeper understanding of how and why financial markets behave the way they do.
In general, we gravitate toward people who like to “look under the hood” and see how everything is interconnected.
And the way we usually like to present that information is to focus on the human aspect of that behavior. Because at the end of the day, economics is simply the study of what people do with their money, and why.
But while taking that approach naturally lends itself to commodities and industrial processes, it isn’t often analogous to what most people think of as “normal” markets — FAANG stocks, for instance.
However, the huge earnings and subscriber miss that Netflix posted after market close on Tuesday — which has sent shares plummeting nearly 10% — gives us an opportunity to dig into consumer behavior and economic conditions in an interesting and meaningful way.
And getting to work with data at the intersection of macro- and microeconomic trends is what switches us on every day… So, let’s get started.
First off, we have to get a sense of where jobless numbers are headed. And the good news is that today’s data shows that initial claims — which came in at 547,000 — are finally starting to trend downward.
Though if I were to compare this figure to the Global Financial Crisis (GFC), that number still looks really bad.
The positive takeaways are that initial claims have finally fallen below the 2009 peak, are trending in the right direction and will continue to improve as the country gets vaccinated and approaches herd immunity.
However, initial claims become continuing claims, and when continuing claims run out, people remain eligible for the pandemic-related extended benefits Congress passed into law last year.
And when we look at the total number of people collecting unemployment, the picture begins to look a little worse.
That number remains 50% higher than the GFC, and is starting to get sticky.
Needless to say, many of those who aren’t currently employed are already scaling back small subscription services like Netflix.
And as such, it’s not exactly a surprise that net subscription growth came in at just 3.98 million — a full 33% below their prior guidance of 6 million. Worse, the company lowered Q4 guidance to just 1 million net new subscribers.
But it’s not just the miss here that’s concerning, it’s the implications for the future.
We’ve talked before about how base effects matter when making year-on-year comparisons.
Netflix was naturally a huge pandemic winner as people were essentially paid to stay home for a portion of last year.
But with the twin problems of difficult year-on-year comparisons and the continuing struggles of unemployed and underemployed U.S. citizens, it’s very possible that subscriber growth could slide even further than that, and possibly turn negative.
Source: Bloomberg, Seawolf Research
Netflix blamed the slowdown on a weak content slate rather than competition from HBO Max and Disney+, and that does make some sense. Production sets were shuttered during much of the pandemic, so their pipeline of projects slated for release in 2021 had to be pushed back.
How far, unfortunately, we don’t know. The company confirmed that new content — including new seasons of popular shows Money Heist and The Witcher — would be coming along, but they did not specify exactly when.
If pushed back far enough, there’s a good chance that the competition will be able to take market share away from the big red “N.”
And with Season Two of Apple TV’s fantastic show ‘Ted Lasso’ set to be released in July, I would venture to say that those who are forced to financially choose between the “same old” Netflix and a “brand new” Coach Ted are going to choose the latter.
I know I am.
Netflix stock prices have mostly been stuck in a holding pattern between $500 and $550 for the bulk of this year.
But they’ve been also making consistently lower highs and lower lows for almost three months now.
In my view, that constitutes an incredibly bearish price trend. And when coupled with a less-than-rosy economic backdrop, this is a dip I wouldn’t really want to buy at all.
In fact, this price action looks like it’s headed down to $450 rather than back up to $550.
And I’m confident enough that Apple’s Ted Lasso is going to win over Netflix subscribers, I’ll even leave you with one of my favorite quotes of his…
“I would not bet on that, unless you want to win a buttload of money.”
All the best,