January 22, 2020
Netflix’s Q4 2019. Boeing’s bad year. The beginning of a new coronavirus epidemic.
Netflix Q4 2019 earnings report beats expectations
Netflix reported its Q4 2019 earnings this week. The company outperformed expectations by beating subscriber growth estimates, adding 8.76 million new subscribers (14.5% above forecast). The company also continued to increase its average revenue per user (ARPU), which increased 9% year over year as the company optimizes for revenue in the North America region.
Growth is powered by strong international subscriber additions. The company added only 550,000 subscribers in the US and Canada (about ⅓ of new subscriptions within the same period in the previous year, which was an exceptionally strong year). The continued slow growth in North America is because Netflix has largely saturated the market, as well as due to increased competition from Disney and Apple. As you can see in Figure 1, the international subscriber base has been powering the company’s growth.
Figure 1: Netflix subscriber growth by the quarters
Despite its user base being dominated by International subscribers, domestic (US) subscribers are generally more profitable. See Figure 2 for the breakdown of the two.
Figure 2: Contribution margins of International vs. domestic subscribers
Netflix also lowered its forecasted subscriber growth for Q1 2020, from 9.6 million new subscribers to 7 million. As a result of the weaker guidance and lowered outlook, the company share price remained relatively flat.
Trading of Boeing shares was halted on Tuesday, January 21st after the stock declined by more than 5% during the day.
The large one-day decline occurred after Boeing announced that the timeline to get its 737 MAX fleet certification (required before the fleet can fly again) would be delayed until the second half of this year. The 737 MAX - Boeing’s most popular plane model - has been grounded since March of last year, after two fatal crashes in the span of five months, both related to software malfunction. The grounding of the 737 MAX is extremely costly to the company and has left the air travel industry 5% short on capacity. The trickle down effect of this prolonged grounding is now being felt by the rest of the industry. GE (ticker: GE) reported reduction in cash flow, as orders of its jet engines are impacted by the grounding. Meanwhile, Spirit Aero System (ticker: SPR) - makers of fuselage and engine parts for the MAX - plans to cut 20% of its staff. As a result of this prolonged crisis, Boeing is looking to secure a US $10 billion loan so that it can keep its suppliers afloat (it cannot risk the collapse of its supplier ecosystem), reimburse customers, and maintain the 400 newly built MAX planes that it can’t deliver until global regulators clear the plane to fly again.
Stocks of US Airlines and luxury goods fell today after news broke that the latest coronavirus has made it to the US.
The worry is that the potential outbreak can dampen holiday travel of Chinese tourists (it is Chinese New Year this upcoming weekend). After killing 17 and infecting more than 500 people in China, as well as having spread to Japan, South Korea, and Thailand, the virus has made it to the US shores (the patient is in good condition, however). Coronaviruses typically spread among animals, but there have been past outbreaks where animal to human, and subsequently human to human, transmissions occurred. Recent outbreaks include the Severe Acute Respiratory Syndrome (SARS) and the more recent Middle East Respiratory Syndrome (MERS). It’s still unclear how bad the new outbreak could be. The last time SARS happened, China’s GDP growth was reduced by one percentage point.
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