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TEMPUS

Crown is slipping at dominant Netflix

The Times

Since I stopped my subscription, for the past few months I’ve been bombarded by emails from Netflix. I’ll be back, but there’s nothing new I want to see at present.

Millions of people feel the same way, despite such hits as Bridgerton, The Crown and The Queen’s Gambit. This week the company said that its first-quarter subscriptions had risen by a net 3.75 million, compared with the six million it had forecast and the 15.7 million figure of a year ago. For the three months to the end of June, only another million are expected to sign up.

Those numbers prompted a slump in Netflix’s share price of more than 10 per cent, cutting the group’s market value by $25 billion (although the stock has recovered a little since).

Netflix is still making plenty of money — it recorded profits of $1.7 billion on revenue of $7.16 billion in the first quarter, ahead of forecasts of $1.3 billion and $7.1 billion, respectively — but this is a crucial moment for investors. As with any non-stop growth business, the first slowdown prompts big questions. Can the company recover its poise? If not, how much mileage is left in the shares as they continue to generate cash?

The way Netflix tells it, it’s merely a matter of timing. It was boosted by Covid-19 restrictions and pandemic-driven blows to film and television production schedules. Now customers are being freed from lockdowns and are finding other things to do. The official line is that normal service will resume in the second half and viewers will return.

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According to Reed Hastings, 60, Netflix’s chief executive: “Ten years we’re growing smooth as silk and then it’s just a little wobbly right now. And, of course, we’re wondering, ‘Wait a second, are we sure it’s not competition?’ But we looked through the data, looked at different regions where new competition has launched and we just can’t see any difference in our relative growth.”

Nevertheless, competition is the crux of the matter. For years Netflix was dismissed by the big Hollywood studios as no more than a sideshow that posted DVDs of films after their cinematic life had ended. But since the upstart began to make original content, the studios have been forced to regroup and attack. Amazon and Hulu have been around for years, but in 2019 Disney bought the Fox film studio and started streaming. Paramount, HBO and Apple have since joined the pack.

The streaming league table is being studied as closely as the pop charts once were. According to Parrot, a data analyst, Netflix’s market share has slipped from 54 per cent a year ago to 50 per cent. Yet at this Sunday’s Oscars, Netflix has two Best Picture candidates, Mank and The Trial of the Chicago 7, and 33 other nominations. Next is Amazon with 12. Traditional studios are eating dust. As production returns to normal around the world, Netflix plans to spend more than $17 billion on content this year, dwarfing everyone else.

Last October Netflix raised the monthly cost of its standard plan by $1 or the equivalent, and its premium rate by $2. It is also trying to limit password-sharing. Most of its income is now non-American, focusing on emerging markets such as India and Latin America, where recent coronavirus surges have prompted new lockdowns.

This is a massive business and one financially sound enough to consider returning money to investors through a share buyback, despite starting to generate net cash only last year. Yet with a stratospheric price-to-earnings ratio of 82 and no dividend, the shares have the feel of the cartoon character who runs off a cliff and treads thin air. It won’t be that dramatic, but the chasing pack are gaining ground.

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Advice Avoid
Why The glory days have gone and investors are likely to view the shares with increasing caution

Relx

Although it was light on detail, analysts liked yesterday’s first-quarter trading update from Relx enough for the shares to rise by a reassuring 24p, or 1.2 per cent, to £19.43½.

On the face of it, most of the company’s business should be enjoying a good pandemic: it is in medical publishing, led by The Lancet; its LexisNexis data analysis operation helps to prevent online fraud and money laundering; and it serves the legal profession that resolves the resulting disputes. Yet while the outlook for the risk division, which also serves the insurance industry, is “strong underlying revenue growth”, legal and scientific, technical and medical are expected to deliver no more than “modest” growth.

The division that may hamper Relx is exhibitions. It is one of the world’s leading organisers along with Informa.

Naturally, this activity has been devastated by the pandemic and has hit Relx shares a couple of times in the past year. However, while it normally accounts for half Informa’s turnover, it is only 5 per cent of Relx’s. So shareholders can afford to be indulgent when Erik Engstrom, 57, the chief executive, says enigmatically that the outlook for exhibitions is uncertain.

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That may be intentionally pessimistic, given that so far this year the company has staged 56 physical events, primarily in Japan and China, and even one in the United States. Britain and Europe are yet to reopen.

Next week Relx will host a series of Lancet webinars about Covid-19 vaccines for the general public, explaining how they work and reviewing safety and efficacy data.

The shares have risen by £3 since Tempus recommended them last October. Once uncertainty dissipates and the exhibitions business recovers, they should have further to go. They reached nearly £21 early last year.

A demanding 28 price-to-earnings ratio is bolstered by a 2.62 per cent yield and a board that clearly likes to keep that topped up.

Advice Buy
Why The legal, fraud and medical divisions are all benefiting from the pandemic and the exhibition business’s return will be a bonus

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