Interactive Investor

Must read: stocks slump, Deliveroo, Netflix, Tesla

Our head of investment rounds up the morning's big news.

19th October 2023 09:05

by Victoria Scholar from interactive investor

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    GLOBAL MARKETS

    European markets have opened lower, with the FTSE 100 under pressure dragged down by Rentokil Initial (LSE:RTO) which has plunged by around 15% after it warned of weak demand in North America.

    Technology stocks are outperforming in Europe, while real estate and autos are struggling as investors digest earnings on Wall Street from Netflix Inc (NASDAQ:NFLX) and Tesla Inc (NASDAQ:TSLA). Rising Treasury yields and risk-off sentiment driven by uncertainty in the Middle East have sparked declines across equity markets. 

    London has reclaimed its position as Europe’s largest stock market, overtaking Paris, after France stormed into first place last year. This has been driven by gains for the oil giants BP (LSE:BP.) and Shell (LSE:SHEL) which have caught a bid on the back of rising underlying oil prices. A weak sterling has also helped to lift the UK exporters. 

    Wall Street closed sharply lower on Wednesday, with the Nasdaq leading the losses to closer lower by over 1.6%, while the 10-year Treasury yield hit the highest level since 2007.

    DELIVEROO

    Deliveroo (LSE:ROO) kept its 2023 full-year guidance unchanged – it expects adjusted EBITDA to be in the range of £60-80 million and gross transaction value (GTV) to come in at the lower single-digit percentage growth in constant currency. In the third quarter, GTV rose by 5% year-on-year with particular strength in the UK and Ireland where it was up 9%. But revenue growth lagged, rising 3% in constant currency partly due to investments. 

    Deliveroo has been trying to respond to the challenging consumer backdrop, but promoting value within the app through promotions such as meal deals and low delivery fees on certain orders. However, its international business is still facing an uphill battle, with GTV declining by 1% in constant currency. Plus, orders fell by 1%, weighing on shares today. 

    Amid the rebound in tech this year, Deliveroo has been a stock market winner in 2023, rallying around 36%. Despite this, shares are still trading at less than half of their value from when it initially floated on the stock market in March 2021, and investors have failed to get excited about its mixed update today, with the stock caught up in the broader weakness across European markets.

    NETFLIX 

    Shares in Netflix soared 12.5% after hours. The streaming giant reported nearly 9 million new subscribers in the third quarter, sharply above expectations for a figure of 6 million and guided for similar growth this quarter.

    This was the best quarter in terms of customer additions since Q2 2020 during the pandemic when lockdowns sparked a surge in streaming demand. This is partly thanks to its recent crackdown on password sharing which has resulted in new subscriptions. It managed to achieve a quarterly operating margin of 22.4%, ahead of expectations for 22.2% and forecasts that the figure will hit 20% in the full-year, at the top end of its previously guided range for between 18% and 20%. 

    Revenue in the quarter hit $8.54 billion, meeting analysts’ expectations, while earnings per share hit $3.73, ahead of forecasts for $3.49. Netflix has been raising its prices in the US, UK and France also helping the boost its shares. The writers’ strike meanwhile has led to a reduction in content spending this year. 

    A combination of its clampdown on password sharing and price hikes have helped Netflix beat expectations in terms of subscriber additions. Shares enjoyed a strong performance this year until the July highs but have struggled to maintain momentum since then. The after-hours boost has helped to reverse some of its recent decline. 

    TESLA 

    Shares in Tesla fell after-hours following a quarterly miss on both the top and bottom lines for the first time since 2019. 

    The electric vehicle giant reported third-quarter revenue up 9% to $23.4 billion, below analysts’ expectations, while net income reached $1.9 billion, falling sharply from $3.3 billion this time last year. Tesla has been cutting prices this year to try to uphold demand amid the weak consumer environment. However, this has had a negative impact on its gross margin which slumped to 17.9%, below forecasts and sliding from 25.1% a year ago. Margins also took a hit from its increased operating expenses relating to its upcoming Cybertruck model and AI spending. But its energy business selling batteries and solar panels was a bright spot. 

    CEO Elon Musk expressed nervousness about the impact of rising interest rates on consumer appetite for new cars. He was also cautious about the economic outlook. 

    Tesla continues to try to focus on making affordability a priority, given the hefty price tag of around $42,990-$119,990 this year depending on the model. Just this week Tesla cut the price of its cheapest car, the Model 3 in Britain in a bid to offset weak sales. 

    The disappointing results are not a major surprise given Tesla’s weak vehicle delivery figures reported in early October. Plus, it is dealing with the well-documented macroeconomic headwinds of the sluggish consumer backdrop and the pressures from tighter monetary policy. 

    Shares have been on the bounce back this year after a torrid 2022 when Tesla was caught up in the high inflation, rising interest rate ‘tech wreck’. But despite this year’s surge, there’s still a daunting upward climb ahead to try to reclaim the highs seen in late 2021. 

    A number of analysts including at Canaccord Genuity, Citigroup and Wells Fargo have cut their price targets on the stock today in light of its earnings, adding to pressure on its share price.

    These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

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