Netflation

  • Market Overview

Market Scorecard

US markets have been very volatile since the start of the year. More than 220 US-listed companies with over $10 billion market capitalisation are down at least 20% from their highs. These include companies like Disney (NYSE: DIS ), Salesforce (NYSE: CRM ) and Twitter.

The tech-heavy Nasdaq has seen the most turbulence, with around 39% of its index constituents having at least halved from their highs. The index itself is roughly 7% off its peak, which highlights the importance of stock picking and portfolio composition. We've stayed out of the higher beta stocks (no profit, fast growers) so we've sidestepped most of the landmines.

In company news, Jack Dorsey's company Block (formerly known as Square (NYSE: SQ )) has committed to building an open Bitcoin mining ecosystem, whatever that means. Elsewhere, Chinese casino stocks surged after Macau's cabinet drafted a new gambling licensing law which seems more generous to the operators than expected. Sands China (HK: 1928 ) and Wynn Macau closed up 15% and 12% respectively.

Yesterday, the JSE All-share was up 0.58%. US markets were closed for Martin Luther King Jr. day.


One Thing, From Paul

One of the key questions for investors in e-commerce stocks is whether the surge in online sales in 2020 (due to Covid lockdowns) would be sustained in 2021. The answer is yes.

"American consumers spent a record-breaking $204.5 billion online during the holiday season, despite higher prices, weaker discounts and snarled supply chains. Online sales during the two-month holiday period were up 8.6% this year, on top of the massive 32% growth seen in 2020."

The trend can be seen in the chart below. These numbers come from a report compiled by Adobe (NASDAQ: ADBE ). The annual Adobe Digital Economy Index data was released on 12 January 2022.

Late 2021's growth confirms that the online shift triggered by the pandemic is permanent. Stocks that we own that have exposure to this trend include Amazon (NASDAQ: AMZN ), obviously, as well as online payment processors Visa (NYSE: V ) and PayPal (NASDAQ: PYPL ). Internet advertising platforms like Google (NASDAQ: GOOGL ) and Meta Platforms (Facebook (NASDAQ: FB )) lead shoppers to online sales. Those who are really keen on the e-commerce trend could also consider investing in Shopify.

Byron's Beats

Having a large and engaged user base is a massive asset and many of our tech titans are in this fortunate position. Every now and then they launch a new product, and if it's a success, it grows incredibly quickly. Amazon's advertising business is a great example of this.

Having direct access to consumer shopping data is very valuable to advertisers. Analysts now estimate that advertising was 7% of Amazon's 2021 revenues after growing 50% in the year. A few years back, online advertising was a two horse race between Facebook and Google.

The beauty of being a shareholder of these amazing businesses is that you can sit and watch them create new businesses from scratch. You can follow its development from a simple idea, to a big top-line mover. Launching these "side bets" comes at very little risk because the main business is in such great shape. Lovely to be a shareholder.



Michael's Musings

Over the weekend Netflix (NASDAQ: NFLX ) announced that they are increasing subscription prices in the US. The company has incredible pricing power, meaning that every year or two they push through higher prices.

When Netflix started, their original price point was way too cheap, but they needed to convince people to sign up for the service. Now that the US market is considered 'mature', where growth rates have slowed and they have a loyal customer base, they can increase prices without significantly impacting subscriber numbers. What is an extra $1 or $2 a month anyway? You can't even get a breakfast bagel with that.

Netflix currently has 74 million North American customers. An extra $2 a month from each user results in additional profits of $148 million a month or $1.8 billion a year. What an amazing business! It is worth noting that the price hike currently only applies to new customers, and existing customers will gradually see the price increase come into effect.

Bright's Banter

Unilever (LON: ULVR ) announced that it had approached GlaxoSmithKline (LON: GSK ) and Pfizer (NYSE: PFE ) over the weekend about buying their consumer-health joint venture. Unilever wants to increase its share of the health and hygiene market. The portfolio in question includes big-selling products like Advil painkillers and Sensodyne toothpaste and is estimated to be worth around $68.4 billion.

This offer is part of Unilever's bigger revamp which will be announced in full later this month. According to Bloomberg, the FMCG behemoth will focus more on health, beauty, and hygiene which suggests that the company might sell off its food operations, including Ben & Jerry's and Magnum ice cream brands.

If the deal goes through, one of the biggest winners will be Paul Singer's hedge fund Elliot Management. He has been pushing GSK to consider a sale of its consumer unit instead of spinning off the assets as a separate listed entity, which was the original plan. Let's see if the deal goes through though. GSK has already rejected the first offer, and Unilever is going back to the banks to ask for more money to sweeten the deal.


Signing Off

Asian markets are mixed this morning. Shares in Hong Kong and South Korea are down, while equities in mainland China and Japan are up.

We're gearing up for another big week of US earnings releases. Goldman Sachs (NYSE: GS ) will report results this afternoon, while Bank of America (NYSE: BAC ) and Morgan Stanley (NYSE: MS ) are scheduled for tomorrow. We're really looking forward to the Netflix numbers that come out on Thursday.

US futures are down in early trade, so we might see a softer open after the US public holiday. The Rand is currently trading at R15.43 to the US Dollar.

Have a good day.

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