Netflix is like a thoroughbred racehorse. At full gallop, the streaming video group moves at breathtaking pace, yet even the slightest knock can cause it to stumble. That much was borne out by Netflix’s latest trading figures, published on Monday, which brought a recent blistering run on the Nasdaq to a clattering halt.
Shares in the company fell by 10 per cent at one point yesterday, although they recovered a little later to close more than 5 per cent down, after growth in its subscriber numbers fell short of expectations. Between April and June, it added a 5.2 million new paying customers — about a million shy of expectations — taking its subscriber base to 130 million.
Growth has largely plateaued in its domestic market, where it added 740,000 subscribers, taking its viewership to 56 million. Outside the United States it has 68.4 million, after adding 4.6 million subscribers in the quarter.
On the face of it, most chief executives would kill to have Netflix’s “problems”. It is the world’s largest video streaming company and a dominant force in the film business. It will spend $8 billion on its own productions this year, outgunning many of the big Hollywood studios. Yet Netflix made only $384 million of profit in the second quarter, a flimsy support for its towering valuation, which stood at $174 billion last night. Even a small disappointment can have an outsized effect.
Mr Hastings doubtless would dismiss the slowdown as a blip, a manifestation of the short-term horizons of the prosaic public market investor. Like Jeff Bezos, founder of Amazon, he is dreaming big and willing to spend lavishly. That should work out fine, as long as can keep Wall Street’s moneymen onside. But he can’t afford many slip-ups. Netflix is on course to burn through up to $4 billion in cash this year and it expects outflows for “many years” to come. True, it ended the quarter with a cash balance of $3.9 billion, but it has $8.4 billion of debts and $18.4 billion in long-term contracts to produce or licence content. Netflix said that it would continue to tap the high-yield market to fund expansion.
It is also being challenged by traditional media powerhouses. AT&T, America’s largest telecoms company, is buying Time Warner. Disney and Comcast are scrapping over the bulk of 21st Century Fox’s entertainment businesses, including its movie studio and stake in Sky. Both deals are about scale in an escalating war for talent.
In addition, Netflix has other challengers much closer to home. Silicon Valley executives have long realised that owning content is the key to luring users. Amazon, Facebook and Google have strong video offerings and billions of dollars of capital to deploy. Last month Apple struck a multi-year deal with Oprah Winfrey, the doyenne of daytime TV. It has earmarked $1 billion to make shows.
None of this is to say that the Netflix business model is doomed to failure. For investors, the question is whether it can write an Amazon-like ending to its story, by creating an empire that generates big enough cashflows for it to continue to expand. Tesla, the electric carmaker, represents an alternative narrative. Elon Musk, its founder, has consistently missed production targets, failed to stem its losses and is widely expected to tap investors for billions of dollars this year.
Netflix should enjoy a boost in subscription figures thanks to new series of the hit shows Orange is the New Black and the Breaking Bad spin-off Better Call Saul. Still, it is hard to argue that it is a screaming “buy”, even after this week’s slump.
ADVICE Avoid
WHY Shares are trading at more than 100 times projected earnings for this year. Sell if you already own and avoid if you don’t
SSP
When Tempus rated SSP a “hold” in January, the shares were trading at 675p, just shy of an all-time high. They responded to yesterday’s third-quarter update with a rise of 20¼p to 678½p, but that largely took them back to where they were at the start of the year. The big question is: at what point will the shares regain the momentum that had seen them more than triple since they were floated at 210p in 2014?
The quality of the transport catering group is not in doubt, as the latest trading update shows. In the three months to the end of June, it reported a 7.3 per cent jump in group revenues at constant currency on the back of like-for-like growth of 2.7 per cent, net contract gains of 3.3 per cent and a 1.3 per cent boost from the recent acquisition of Stockheim, a German travel concessions business. Including the impact of the weak pound, revenues were up 5.8 per cent.
Looking at the regional breakdown, there were the usual ups and (very few) downs. In Britain and continental Europe, its airport operations continued to show growth, but trading in the railway sector remained softer, not helped by strike action in France. Trading in North America was positive, while its rest of the world division continued to deliver good like-for-like sales growth, notably in Hong Kong, Egypt and India.
SSP said that like-for-like sales for the first nine months had risen by 2.8 per cent and that it expected to continue to grow at 2 per cent to 3 per cent for the rest of the year.
Analysts nudged up their full-year earnings forecasts to about 24p, equating to a punchy multiple of 28, but analysts believe that its compounding growth story is attractive, shows good momentum and promises consistent returns to investors, with the increasing likelihood of a £100 million special dividend at the full year, the second year in a row of such a payout.
SSP, which operates in 30 countries under such brands as Upper Crust, Starbucks and Yo! Sushi, said that its operating margin in the quarter had increased slightly on the first half, showing that Kate Swann, its chief executive, has not lost her touch on cost-cutting.
ADVICE Buy
WHY Solid growth and chance of another special dividend should get shares moving