The Briefing
By Martin PeersGreetings!
Another day, another market sell-off. And things are getting a little indiscriminate. Take today’s 5% to 7% drop in the stocks of Disney, Discovery and ViacomCBS, apparently triggered by a 22% plunge in the price of Netflix. It’s a little like a teacher punishing an entire class for the misdeeds of one student. Penalizing TV stocks for Netflix’s sharply slowing growth doesn’t make much sense. It’s arguably the competition posed by these very companies—with their newish streaming services—that is one of the factors weighing on Netflix’s growth.
Adding insult to injury, none of the three has enjoyed the incredible run-up in value that Netflix has seen in recent years—they’re each valued well below the video-streaming pioneer on a multiple of revenue and profits. That makes sense, given that Netflix has been growing 20% to 40% a year for most of the past decade, while the TV companies were plodding along at mostly single-digit percentages. But it is Netflix's valuation that should contract as its growth rate slows, not those of the other companies.
There’s a little more to it, of course. As MoffettNathanson analyst Michael Nathanson pointed out today, Netflix’s inability to generate cash in 2021 despite producing revenues of nearly $30 billion off global subscribers of 222 million shouldn’t make anyone feel good about the long-term profitability of the streaming business. But that’s always been an issue for the streaming market. If investors have only just caught on to that problem, then they should have been paying more attention. Maybe they deserve to get punished indiscriminately!
Next Week’s Earnings
It’s the calm before the storm in terms of tech earnings. Next week Microsoft and Apple report December quarter results, ahead of a wave of their peers the week after that. Here’s what to expect, based on the average estimates of Wall Street analysts, courtesy of S&P Global Market Intelligence.
Microsoft (Tuesday)
Estimated December quarter revenue: $50.78 billion +17.8%
Earnings per share: $2.32 +14%
The software giant’s growth has steadily accelerated in the past few years, from single-digit percentages in much of the last decade to 17% last year. This year Wall Street is expecting a rate of growth similar to that of fiscal 2021. Driving this growth is Azure, which Microsoft routinely reports increased revenue 50%, without giving further details, as well as smaller businesses like LinkedIn.
Beyond the numbers, we’ll be looking for any more information from CEO Satya Nadella about Microsoft’s broader strategy. The Activision deal announced this week signals Microsoft’s desire to expand its consumer businesses. But the question remains of how Microsoft’s investments in gaming will enhance its long-term returns.
Apple (Thursday)
Estimated revenue: $118.322 billion +6%
EPS $1.89 +12.5%
Apple’s fiscal 2022, which ends in September, is expected to be a slow-growth year compared to fiscal 2021, when revenue grew 33% to $365 billion. That fits Apple’s pattern of the past few years: a few years of relatively weak top-line growth, punctuated by a step up in revenue, thanks to the introduction of a new product category or a strong refresh of an existing one like the iPhone.
That explains the anemic expectations for Apple’s first fiscal quarter. To contrast the projected 6% revenue growth rate, Apple’s revenue in the first quarter of fiscal 2021 grew 21% (and that turned out to be the weakest quarter of the year). Still, the iPhone maker could surprise everyone next week. Morgan Stanley says its monitoring of iPhone production suggests that iPhone sales will be stronger than people expect: It is projecting 10% growth in iPhone revenue.
Peloton's (Minor) Recovery
As bearish as things get, there’s always room for forgiveness, it seems. Check out Peloton, whose battered stock recovered a little today, making it one of the few to gain in another broad selloff. One reason may have been the company’s announcement on Thursday night of preliminary details for its December quarter. Peloton said its revenue was $1.14 billion, 7% higher than a year earlier.
Sounds OK, right? Certainly better than might have been expected based on the news Thursday that the company had temporarily halted manufacturing of bikes and treadmills. But Peloton didn’t disclose the quarterly revenue trajectory for its equipment sales and training class subscriptions. Chances are Peloton sold fewer bikes and treadmills. In the September quarter, for instance, equipment revenue fell 17% while subscriptions rose, translating to revenue growth of 6%. Long term, Peloton likely needs a recovery in equipment sales to underpin subscription growth.
In Other News…
- Twitter fired its head of security, Peiter Zatko, as part of a broader executive shakeup, according to The New York Times. The company’s chief information security officer, Rinki Sethi, is also leaving the company, The Times said.
- Google asked a federal judge Friday to throw out the bulk of a lawsuit filed by Texas and more than a dozen other state attorneys general accusing the company of illegally monopolizing the market for online advertising.
The Information Events
Thursday, January 27—Join us for a live video on the China outlook for 2022. Last year China tech was battered by Covid-19 and regulatory crackdowns. We’ll look at what’s coming next. What are U.S. and other investors thinking about Chinese startups and how can they get returns as the path to an overseas listing gets tougher? Reserve your spot here.
Thursday, February 10 *New Speakers Announced*—We're hosting our first Women in Tech Leadership Forum, convening executive women leaders from the tech industry virtually. The event will feature women from Meta Platforms, LinkedIn, Salesforce, Google and more. The event is free and by invitation only, for C-level women in established tech companies. Very limited space remains; apply for an invitation here.
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