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25 April 2022

Market Round-Up

Netflix shocked many investors last week, announcing that it has lost subscribers for the first time in more than a decade, with the number falling by roughly 200,000 in the first quarter of 2022. The streaming company further forecast that this will fall by another 2m in the current quarter to about 219.6m, thwarting investors’ expectations of a 2.6m subscriber increase. After admitting that it is getting ever harder to grow its membership base, the company’s shares plunged 25% in after-hours trading. Netflix remains the industry leader for streaming services, however, the loss of subscribers was far off its growth forecast making it unclear how long it can hold this position.

The company has said that part of the reason for its marked slowdown is a result of reaching saturation in its biggest markets as people begin to curb spending on non-essential goods and the cost-of-living crisis means a larger number of households are sharing accounts. It has also acknowledged that an increase in competition of streaming services launched by traditional media groups, such as Disney, Warner Bros Discovery, and Paramount, has led to higher market penetration, therefore, making it difficult to attract more customers. In the past, Netflix has rarely admitted that it has faced any serious competition, but when it began to show signs of slowing last year, there was a change of tone in which company officials blamed “noise” from the lingering effects of the COVID-19 crisis for the struggle. Increased competition and password-sharing have both contributed to revenue growth headwinds for the video streaming pioneer. Exacerbating its problems has been the pull-out from Russia following its invasion of Ukraine, which Netflix said lost 700,000 subscribers. Another 600,000 people stopped its service in the US and Canada after Netflix raised its prices, however, this move was nevertheless “significantly revenue positive”.

Going forward, Co-CEO Reed Hastings shared in the post-earnings interview that the company was looking toward advertising in lower-cost tiers to enhance growth and said this was likely to happen in the next couple of years. Hastings said there was evidence such a move would work and cited Hulu and HBO Max as two streamers that have expanded to incorporate ad tiers and ad-free tiers in recent years. Netflix is also looking to crackdown on password-sharing – it has recently moved to stop the activity in parts of Latin America and wishes to expand this to other parts of the world. In its letter to shareholders, the company noted that in addition to its 222m paying subscribers, it believes there are more than 100m households that share passwords, approximately 30m of which are in North America. In response to greater competition, the company aims to improve programming and recommendations by building development and creative excellence. One method already introduced is a “double thumbs up” tool for members to express greater admiration for content. It is also exploring diving deeper into video games. With much of its future growth forecast to come from outside the US, it will continue to focus on the language presentation/localisation and personalisation aspects of its service. Netflix said it is producing film and TV in more than 50 countries and said three out of its six most popular TV seasons of all time were non-English-language titles. Given its shares are down about 40% this year, these changes will be vital to avoid any more unwelcomed surprises for investors.

Despite Boris Johnson’s announcement spotlighting the UK as the fastest growing G7 economy in 2022 thanks to its successful vaccine programme and recovery from the coronavirus pandemic, the IMF forecast that the UK will in fact be the worst-performing G7 economy next year. This comes as the cost of living continues to rise and recent tax increases are projected to drastically slow economic activity. Although the UK hold the fastest rate of growth for 2022, matched with the US, it is still below expected as the IMF have downgraded growth forecasts across the world. 2022 GDP growth is now expected to be 3.6%, down from January’s prediction of 4.4%, and the UK’s growth estimate has been cut from 4.7% to 3.7%. In 2023, however, UK economic growth will slump to the bottom of the league table of comparable economies in the G7 while also facing the highest inflation and be the slowest to return to its 2% target. The IMF have predicted that Britain’s economy is likely to increase by just 1.2% in 2023.

Throughout the COVID-19 crisis, the UK’s economic performance has been average among the G7 countries. This medial has been masked by greater volatility following a relatively big contraction in 2020 followed by a faster recovery last year. Year to year, the volatility of the UK’s performance has depended on the timings of its lockdowns, subsequent bounce-backs, and its exposure to Russia’s invasion of Ukraine. Weak growth will persist next year as households take on the cost-of-living crisis and companies deal with an increase in the corporate tax rate from 19% to 25% next April. The IMF has also noted that Britain, like the United States, has seen a drop in the number of older workers since the pandemic, creating labour shortages. Slow growth predictions have also led the IMF to forecast that unemployment will rise to 4.6% after it hit a multi-decade low of 3.8% at the beginning of 2022.

Please note that this communication is for information only and does not constitute a recommendation to buy or sell the shares of the investments mentioned. The value of investments and any income derived from them may go down as well as up and you could get back less than you invested.
 
Market Round-Up
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