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Market Outlook

How will Netflix and Tesla’s share prices fare during earning season?

Tesla share price: a Tesla charging station

It’s US earnings season and over the next few weeks there will be results announcements from a wealth of major businesses, as they update the market on their financial states of play. Big tech is in the spotlight, with Tesla and Netflix both set to reveal their numbers.

What will the announcements mean for the Tesla and Netflix share prices?

Netflix Q2 results

TUE 20: When the streaming giant reported a big miss on Q1 user growth in April, the Netflix share price fell back sharply, and while the shares have pared back some of those losses, there is some concern that the explosive growth of the past 12 months is unlikely to be replicated.

Despite the disappointment of a slowdown in user growth, revenues came in much better than expected, at $7.16bn, while profits came in at $3.75 a share, well above expectations of $2.98.

Expectations for user growth in Q1 were always likely to be hostage to fortune given that they were set at a rather lofty 6m, and with lockdowns set to be eased and the summer months usually a time when people want to go outdoors, there was always the risk of a miss, which is precisely what we saw, with 3.98m new users added in Q1. While that was disappointing, the real kicker came with the user growth estimates for Q2 which came in at 1m, well below estimates of 4.4m, and sharply down from last year’s 10m, which were pumped up by the first Covid-19 lockdown.

Estimates for Q2 revenues are still expected to be healthy at $7.3bn, and while the next two quarters are likely to see slightly slower subscriber growth, the second half is likely to see these numbers pick up as new series of Stranger Things, Lost in Space and The Witcher get rolled out.

Operating margins rose to 20%, while the company said it still expects to come in cash flow positive for the full year. The Netflix share price faces a huge number of challengers in the months ahead with the likes of Disney+, Apple TV+, the Warner Media/Discovery merger, and Amazon paying $9bn for the MGM back catalogue, but it still remains very much the market leader internationally with nearly 210m subscribers. 

Tesla Q2 results

MON 26: Since entering the S&P 500 on 21 December 2020 at $666, Tesla’s share price has just about managed to hold on to the upward momentum that has been in place since the beginning of 2020, when the shares were down at the lowly levels of $83. Having hit a record high of $895 back in January, the Tesla share price has slipped back a touch in the past few months as questions start to get asked about whether this sort of valuation can be sustained at a time when the likes of GM, Ford and Daimler are starting to ramp up their electric vehicle offerings, and have the ability to scale much more quickly.

Last year the company only just missed out on meeting its target of selling 500,000 cars in a single year, with the addition of extra capacity in its new Chinese factory helping hugely in this regard, and hopes high that 2021 could see the company break this target. The company is certainly making great strides in building up capacity, with new plants in Austin, Texas and Brandenburg in Germany set to come online sometime this year, though the German plant does appear to have hit some snags, which could mean the opening is delayed.

The China love story also appears to be running into problems after the Chinese regulator ordered the company to fix a safety issue on all of the cars sold there, due to a problem that means that the car’s autopilot can be enabled remotely. This would require a fix on over 285,000 vehicles, which is likely to be costly. The company has done well in managing to post consistent profits on a quarterly basis over the past 12 months, though this has only been achieved by sleight of hand in the form of the sale of regulatory credits, and energy storage sales. With a market cap in excess of the entire automotive sector,Tesla shares have an almost cult like status amongst its devotees. The Tesla share price has held up fairly well so far this quarter but that appears to have more to do with CEO Elon Musk talking up bitcoin and extolling the virtues of cryptocurrencies as a means of payment, than for their ability to sell cars.

Gross margins on Tesla cars fell to 19.2% in Q4, the lowest in 12 months, though on the plus side there was positive free cashflow of $2.79bn, although this slowed to $293m in Q1. You can argue as to whether or not a decline in margins really matters, but at a time when competition is only expected to get fiercer, and Tesla has already cut prices in China, and will probably have to continue to do so again as it brings its cost of production down, the pressure on margins is only likely to increase further.

In Q1 the company said it had delivered 185,000 vehicles, with most of them being Model 3 and Model Y. The Model S and X saw about 2,000 deliveries in Q1, with the hope that production and deliveries can be ramped up further. Looking ahead, Tesla said it hoped to start producing its new crossover SUV Model Y this year, however the delays in Germany could well slow this rollout. Profits are expected to come in at $0.94 a share.

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