Netflix & Snap Q1 2020 – Night of surprise.

Snap is the biggest surprise of the night. 

Netflix Q1 2020

• Netflix added far more subscribers in Asia and Europe than expected but this did not translate into extra revenue as these subscribers were predominantly in lower-priced countries where the strength of the dollar has impacted net revenue to Netflix.
• Q1 2020 revenues / EPS were $5.77bn / $1.57 disappointing compared to estimates at $5.74bn / $1.63 and very disappointing when one considers the lift in subscribers.
• During Q1 2020 Netflix added 15.77m paid subscriptions as people turned to entertainment to while away the long hours in confinement which was way above estimates of 8.76m net adds.
• The vast majority of these adds were outside of the USA and the weakness in the currencies of Canada, Brazil, UK, and Eurozone put downward pressure on ASPs in USD.
• Netflix is not expecting this level of new subscribers to continue into Q2 which combined with revenue and EPS estimates only slightly ahead of consensus led to the after-hours rally of 12% to quickly peter out to 0%.
• I suspect that many of these subscribers will now stay with Netflix which will help the company is its long-term battle with Disney for the streaming market.
• Consequently, Netflix has boosted its long-term position but the strength in the US dollar cost it a blow-out set of earnings from a financial perspective.
• I still think that Disney is better set up, in the long run, to fight this battle given its catalogue and its mighty balance sheet but there needs to be some visibility on the impact of closing its theme parks before one should get involved.

Snap Q1 2020

• Unlike Netflix, Snap was able to monetise the jump in users and usage that it saw as a result of the lockdown meaning that the initial 13% jump in its shares in after-hours trading was sustained and will be reflected when trading opens today.
• Q1 2020 revenue / EBIT were $462.5m / LOSS $102m compared to estimates at $420.8m / LOSS $122m.
• Daily active users (DaU) rose 20% to 229m and while growth continued at its Q4 2019 YoY rate in January and February, this dropped off in March as digital advertising budgets fell.
• Strength in January and February were a result of changes made during 2019 that continued to pay dividends.
• However, Snap is small and nimble and as such has been able to be quite innovative in terms of shifting its resources to support advertisers who sell products that are still applicable when people are stuck at home.
• That being said, this is clearly not enough to give Snap any idea about what is going to happen in Q2 2020 and as such it has withdrawn its practice of giving guidance for the coming three months.
• However, it did say that it has seen a slowing to 15% YoY growth in April which this week slowed again to 11%.
• This implies that growth even for the most nimble is grinding to a halt leaving the outlook for Q2 2020 extremely uncertain.
• I think that there is limited read-across for Google and Facebook whose giant advertising machines are far more widely spread across the economy but the implication is that as long as Google and Facebook had good January and February then Q1 2020 should not be that badly hit.
• However, the outlook for Q2 2020 is not great and I remain cautious on the ability of the advertising business model to monetise the increased internet usage of users stuck at home.

Take-Home Message

• It is clear from both the economic forecasts and the lack of visibility that the hammer is going to fall hardest on the technology sector in Q2 2020.
• Hopefully, by July, there should be much better visibility on what the return to work will look like and everyone will have a much better idea of what real economic activity is possible in the absence of a vaccine.
• I think the cloud companies still have by far the best visibility and outlook through this crisis and I would continue to back them against almost anyone else.
• Hence, it remains Amazon, Microsoft and Alibaba for me assuming that I have to have anything as the market overall is increasingly looking delusional in terms of the recovery it is pricing in.