Having knocked subscriber growth out of the park last quarter, Netflix’s Q1 earnings left a sobering thought regarding the state of the market: What next?
By now we have all read the biggest headline of the day on Wall Street: Netflix (NASDAQ: NFLX) signed on 15.7 million new subscribers in the first quarter of the year, almost doubling expectations. All this in the same week Disney (NYSE: DIS), its primary streaming rival, announces it could furlough 100,000 staff and is bleeding an estimated $30 million per day.
So it’s all smiles, right? Not exactly…
Netflix did miss on earnings per share, though that’s not what I want to discuss, but rather the worrying unknown future portrayed in the company’s guidance. In its quarterly update the company stated:
“Given the uncertainty on home confinement timing, this is mostly guesswork. The actual Q2 numbers could end up well below or well above that, depending on many factors, including when people can go back to their social lives in various countries and how much people take a break from television after the lockdown.”
Netflix has hit the nail in the head here: what the hell are companies going to do when this pandemic passes?
Others will thrive and survive, like Netflix
Netflix has been the market leader in streaming since it re-invented the television-shaped wheel all those years ago, and they will likely remain in the top spot for years to come, despite rising competition from Disney, Apple (NASDAQ: AAPL), Comcast (NYSE: CMSCA), Amazon (NASDAQ: AMZN), and more.
Its business model will survive this pandemic and even thrive, just like other stay-at-home stocks such as Activision-Blizzard (NASDAQ: ATVI), Slack (NYSE: WORK), and Zoom (NASDAQ: ZM), to name a few. Why should Big Tech change its model either? Microsoft (NASDAQ: MSFT) and Facebook’s (NASDAQ: FB) model worked pre-pandemic, it’ll work post-pandemic too.
What about the other businesses?
What are the businesses who’ve been completely uprooted or shut down going to do when this all passes?
The restaurant industry is taking a hit, there’s no hiding from that. Overall restaurant transactions were down 42% in March, as 97% of all restaurants in the U.S. are now operating under some form of restriction. Some have adapted and are prioritizing delivery and takeout. This strategy is harboring results for some: Texas Roadhouse (NASDAQ: TXRH) is up 14% in the last month, while Chipotle (NYSE: CMG) just reported a 3.3% same-store sales increase in Q1. For restaurants, it is a case of surviving this pandemic, then rebuilding.
Airlines will be more complicated. We all know how much they’re suffering, and even Berkshire Hathaway (NYSE: BRK.B) CEO Warren Buffett has distanced himself recently due to the industry’s uncertain future following exposure to the virus. For an in-depth look at the dangers facing airlines in a post-Covid world, I recommend this fantastic piece from my colleague Michael O’Mahony:
Why Did Warren Buffett Sell His Airline Shares?
Despite all this, the bottom line is that we have no idea when this will end and what we are going to do once it does.
Let’s talk about oil…
The price of oil has hit rock bottom in the U.S. and is plummeting worldwide. This is because people are not able to actually go anywhere, causing demand to fall to unprecedented levels. It’s affecting all the major indices; yesterday the Dow (NYSEARCA: DIA) fell 2.67%, the S&P 500 (NYSEARCA: VOO) tumbled 3.07%, and the Nasdaq (NASDAQ: NDAQ) dropped 3.48% because of it. To understand the reason for this, you can read the article below:
For now, I want to talk about the knock-on effects this has had on a company I’m a big fan of: Tesla (NASDAQ: TSLA).
You would think that the worldwide collapse of oil would be good for an electric vehicle maker, but for now, it’s anything but. With oil prices dropping to record lows, electric vehicles have become less attractive as non-electric cars suddenly become much cheaper to operate.
With an earnings call on April 29, it will be interesting to see how this pandemic affects the company’s sales, which are sure to take a hit.
However, if you are worried, here’s some optimism:
- Scientists predict that global oil supplies will run dry by 2052, so Tesla, or at least electric vehicles, are soon going to become indispensable.
- Its Shanghai facility is reopened and operating smoothly.
- The world is currently healing itself as pollution levels decline due to people being inside, and Tesla could spearhead that future green image.
- Tesla is far more likely to survive and thrive in China than its main rival in the region: NIO (NYSE: NIO).
Change is coming, whether we like it or not
I say that Netflix’s warning should terrify investors, but that is only because change IS terrifying. That doesn’t make it terrible though. Sure, we have no idea when this pandemic will end, and we don’t know what world we’ll be entering when it does, but it could be good.
In an exclusive Insight to MyWallSt subscribers, our Head Analyst, Rory Carron, had this to say:
This past week, and (from the looks of it) the coming week will be all about one question: Do we want to go back to normal?
Shall we revert to the status quo? Or shall the world look upon this tragedy as an opportunity to affect some real change? Much like the end of World War II was the catalyst for a great industrial boom and the creation of a middle class, what will be the lasting impact of COVID-19 on the world?
This pandemic will end, and so will the recession which is caused by it, as has historically been the case. For now, the most important thing is to shore up your portfolio, and with our award-winning strategy and list of stocks, we can help.
Sign up for a free access today, and read the complete Insight from Rory, along with so much more that we offer.
MyWallSt operates a full disclosure policy. MyWallSt staff currently hold positions in companies mentioned above. Read our full disclosure policy here.