This year has been dismal for tech stocks, with the tech-heavy US Nasdaq Composite Index down 22% so far. Part of the problem is rising interest rates, which have made investors much less willing to tolerate vague promises from tech companies about future profitability; the cost-of-living crisis and looming recessions in many developed countries have also unnerved investors.
However, some prominent companies have also been dealing with specific issues that have further undermined their share price. A good example is the video streaming service Netflix (Nasdaq: NFLX). His shares have fallen by half this year and are down about two-thirds from their peak.
It’s easy to see why the market has soured on the company. During the pandemic, the number of subscriptions skyrocketed as there was little to do in the lockdowns beyond streaming TV series. However, with the return to work and the resumption of normal social activities, Netflix has suffered the first drops in subscriptions in its history.
It also faces growing competition from rivals ranging from media firms like Disney to tech giant Apple. These companies are jumping on the streaming bandwagon, either copying Netflix’s original content production model or taking advantage of the extensive archives of older content.
There is also concern that many consumers are trying to save money by sharing their account passwords with friends and family.
A perspective of improvement
However, I am optimistic about the future of Netflix. It may have lost 1.2 million paid subscribers since the last quarter of 2021, but this is still only a small percentage of the 220 million subscribers it still has. The small decline shows that Netflix has managed to retain virtually all the subscriptions it gained during the lockdown, even in the face of competition and price increases. And Netflix management expects subscriber growth to resume in the fall.
Meanwhile, attempts to crack down on password sharing and replace the practice with discounts for friends and family should push the numbers even higher. Netflix is also starting to explore ways to further monetize its hit shows, like Strange thingsthrough games and apps.
Another compelling reason to opt for Netflix is its rating. Although his current share price is lower than it was in 2019 when I suggested selling it short, his earnings have grown 165% since then. As a result, it’s now trading at 21 times estimated 2023 earnings, which doesn’t sound like much for a company with an excellent growth track record and a lot of intellectual property. It has deployed its resources efficiently, with an average return on capital employed (a key indicator of profitability) of 15.3% over the last four quarters (compared to 9% in 2019).
The stock has risen in recent weeks and has gained about 50% since May. With its shares trading well above their 50 and 100 day moving averages, I suggest you immediately go long at the current price of $227 at £12 per $1. With a stop loss of $145, this should give you a total downside of £984.
How have my tips fared?
It’s been a rough month for my five long split ends, with four depreciating. Telecom group Airtel Africa fell from 171 pence to 138 pence, while JD Sports fell from 140 pence to 118 pence. Hays Recruitment fell from 125 pence to 120 pence and retailer Dunelm fell from 878 pence to 741 pence. While Pets at Home topped out at the 350p I suggested you should go long at, it subsequently dropped to 332p. The only exception to the trend was construction and industrial equipment rental company Ashtead, which rose from 3,785 pence to 4,380 pence. My long tips generate a total profit of £823.
My short tips have been mixed, with three of the five on the rise. Remote medicine company Teladoc Health fell from $41.89 to $32.71, while DWAC, the holding company for Donald Trump’s social media company, also fell, from $31 to $29.95.
However, Chinese real estate firm KE Holdings rose from $15.53 to $15.67, digital currency exchange Coinbase rose from $67 to $71, and online marketing firm HubSpot also rose from $292 to $331; as a result, the short position was automatically hedged at $320. Counting HubSpot, my short tips generate a combined profit of £4,867, up from £6,330 four weeks ago.
My short and long tips generate a total profit of £5,690. There are currently 11 open tips: Long Airtel Africa, Ashtead, Dunelm, Hays Recruitment, JD Sports, Pets at Home and Netflix; and short Teladoc, KE Holdings, DWAC and Coinbase.
I suggest you increase the stop-losses at Dunelm to 600p (from 578p) and Pets at Home to 240p (from 230p). I also recommend that you lower the level at which you hedge KE Holdings to $20 (from $25); for HubSpot and Teladoc reduced to $50 ($55); for DWAC at $44 ($45) and for Coinbase at $78 ($80).
Trading Techniques: Share Buybacks
Last week, the US introduced a new share buyback tax. Companies will now pay 1% of the value of shares that are repurchased. U.S. companies bought back $882 billion of their own shares in 2021. The practice is popular with businesses: Because it reduces the number of shares on the market, it raises the share price and increases earnings per share, even if underlying earnings are not actually going up.
Still, critics argue that dividends give shareholders more control over their money; buybacks can also waste money if the stock is overvalued. Nonetheless, a study by investment firm Two Sigma covering nearly 10,000 buyback announcements in the US Russell 3000 Index between January 1998 and April 2019 found that buybacks are generally good for shareholders.
Buying immediately after the announcement and holding the stock for up to six months would produce an above-market return on your investment. Even if you waited a month after the announcement, it would still outperform.
A 2018 study by academics Alberto Manconi, Urs Peyer, and Theo Vermaelen found that share buybacks also bode well for shareholders outside the US, looking at 9,034 announcements from 5,620 companies in 31 countries between 1998 and 2010, found that shares of non-US companies that launched buybacks tended to outperform to a similar degree as their US counterparts 12 months after the announcement.
What’s more, companies tended to produce excess returns even four years later, although these returns were slightly weaker for companies outside the US. These results held even after taking into account other factors, such as size and price/earnings ratio (p/e).