Industry Updates

ETFs impacted by Netflix’s blockbuster sell-off

ETFs involved in communications, technology, digitalisation and AI were hit

Jamie Gordon

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The curtains opened on the New Year much as they finished the last for Netflix, with the FAANG streaming stock now down 44% from its all-time-high in November 2021. 

Interestingly, many of the media giant’s fundamentals looked strong as they were announced on 20 January.Full-year revenue for 2012 was up 18.8% year-on-year to $29.7bn while lower-than-expected content spend in Q4 saw margins rise from 18% to 21%. However, content spend still increased – as was planned – which pushed operating profit down 33.8% to $631.7m.

The main story though was disappointing subscriber growth, with 8.3 million new paid members in Q4 2021 behind the 8.5 million forecast. Also, Netflix anticipates 2.5 million new, paying subscribers in Q1 of this year, significantly short of the 4 million for the same period last year.

On Netflix’s subscription numbers, Laura Hoy, equity analyst at Hargeaves Lansdown, commented: “Management blamed a back-loaded content schedule that will see several big releases come out at the end of the quarter but investors were undeniably spooked by the slower growth forecast.

“If the content timing is not to blame, Netflix could be in for a rough ride after a spending spree at the end of last year that pushed margins six percentage points lower.

“Investors were prepared for the margin decline, but worries over how the group will continue to foot the bill for blockbuster releases are creeping in. Add to that the perils of a sizable debt pile in a rising rate environment, and you have the makings for some very nervous investors.”

Hoy added the company relies on big-hit content to attract subscribers and the fees from these members to provide new content. Despite management’s expectations of positive free cash flow this year and beyond, the company plans to spend on expanding into other areas of entertainment, such as gaming.

The sharp sell-off and 25.2% valuation cut that followed the company’s recent earnings has not only hurt those directly invested in Netflix but also some sector and big-name ETFs with significant exposure to the streaming giant. 

For instance, the Invesco Communications S&P US Select Sector UCITS ETF (XLCP) has a 9.1% weighting to the stock while the iShares S&P 500 Communication Sector UCITS ETF (IUCM) claims a 7.1% allocation, according to data from ETFLogic. Since the start of the year, the two ETFs have returned -7.9% and -7.5%, respectively. 

Other significant Netflix weightings include 4.6% in the First Trust Dow Jones Internet UCITS ETF (FDN), 2.6% for the iShares MSCI EM Consumer Growth UCITS ETF (CEMG), 1.6% for the Invesco Nasdaq-100 Swap UCITS ETF (EQQD) and 1.4% weightings in the iShares Digitalisation UCITS ETF (DGIT) and the L&G Artificial Intelligence UCITS ETF (AIAG). 

Aside from Netflix’s Q4 earnings, these ETFs’ year-to-date returns will be in negative territory due to the broader sentiment towards US tech equities – and in markets as a whole. The expectation is 2022 will be a year of interest rate hikes and the removal of central bank life support machines, which will see the discounted cash flow valuations of 2021 eaten away at.

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