Why is Netflix lagging FAANG stocks?

The US mega-cap tech stocks took a tumble in 2022 amid rising interest rates and economic uncertainty, but bounced back in the first half of this year thanks to the generative artificial intelligence (AI) frenzy. But questions remain over whether the FAANG stocks have lost their bite.

• Netflix beat bottom-line estimates but missed on the top-line in Q2 2023.
• Password crackdown has given a surprise boost to Netflix subscriber numbers.
• How to invest in FAANG stocks: the Global X Millennial Consumer ETF is up 14.7% in the past six months.

Collectively known as the FAANG stocks, Facebook (now Meta) [META], Amazon [AMZN], Apple [AAPL], Netflix [NFLX] and Google (now Alphabet) [GOOGL] have long been popular with investors who hope to outpace the broader market in the long term.

The Meta share price has gained 105.6% in the six months to 21 July, while the Amazon share price is up 33.3% in the same period. The Apple and Netflix share prices have logged gains of 34.6% and 17.5% respectively, while the Alphabet share price has risen 20.3%. In comparison, the S&P 500 has risen 12.8% and the tech-heavy Nasdaq Composite is up 23.48%.

A major part of the FAANG attraction is that the companies have stellar financial performance and operational success while boasting strong bottom lines and growth prospects. Excitement around generative AI and how mega-cap tech stocks can capitalise on the opportunity fuelled the FAANG rally in the first half of the year.

AI is predicted to be a big topic this earnings season — Amazon, Alphabet, Apple and Meta are all expected to mention it once again when they deliver their latest quarterly results. However, Netflix was the first FAANG stock to report, in late July, and didn’t mention AI.

Netflix reports as strikes begin

The streaming giant reported its Q2 2023 earnings on 19 July against the backdrop of strikes by actors and writers, some of whom have been picketing the company’s headquarters in Los Angeles.

Members of the film and television industry are worried about the use of AI to write scripts and create digital twins of actors. For its part, Netflix is believed to be shielded from delays and disruption caused by the strike.

“Netflix is poised to do better than most because they produce shows so well in advance. And if push comes to shove, they can rely on international shows, of which they have so many,” Insider Intelligence analyst Ross Benes told CNBC in July.

Revenue for the three months to the end of June rose 3% year over year from $7.97bn to $8.19bn, but missed analyst estimates of $8.30bn, according to Refinitiv. Earnings per share of $3.29 surpassed expectations of $2.86 per share. Net income was up a little more than 3% from $1.44bn to $1.49bn.

Password crackdown boosts Netflix’s subscriber base

The biggest surprise of Netflix’s earnings report was the additional 5.9 million subscribers reported since Q1 2023, taking Netflix’s total subscriber count to 238 million. This was almost three times analyst estimates of 2.1 million.

The subscriber surprise comes as the streamer clamped down on password sharing. There had been worries that “the move would trigger a mass exodus”, according to Hargreaves Lansdown analyst Sophie Lund-Yates, but the figures relieved any concerns.

“In this case, it seems that not-sharing is caring, at least that's how Netflix investors will see it,” Lund-Yates wrote in a note to clients in reaction to the earnings.

Subscribers to its ad-supported free subscription tier nearly doubled from the previous quarter. “It’s still off a small membership base,” noted the company in its shareholder letter, “so current ad revenue isn’t material for Netflix.” Meanwhile, the cheapest ad-free plan has been axed for users in the UK and US.

Questions remain over Netflix’s FAANG status

A key question following Netflix’s earnings is whether the streamer should still be classed as a FAANG stock.

In 2021 when subscriber growth slowed after a bumper pandemic-fuelled 2020, Joel Kulina, then senior vice president of equity trading at Wedbush, suggested that the stock had “been disconnected from the [rest of the FAANG] group for a while now”, according to a note seen by The Street.

Given the impact of the actors’ and writers’ strike, and the absence of any mention of AI in its earnings report, AI is arguably more of a headwind than a tailwind for Netflix, another factor that could differentiate it from the other FAANG stocks going forward.

Free cash projections for the full year being raised by $1.5bn to $5bn in July should boost its FAANG status. But sceptics will likely want to see sustained subscriber growth following the password crackdown.

AI will elevate the FAANG investment case

As for FAANG stocks, the five companies are likely to continue attracting investor interest as they adopt the latest transformative technologies to gain a competitive edge.

“The recent rise of ChatGPT and generative AI, for example, demonstrates how [FAANG] stocks can quickly adapt to future megatrends,” wrote Global X Australia’s Justin Lin in research published in May. Despite this, investors shouldn’t expect to see the FAANG share prices rising in tandem like they did in the first half of the year.

“Going forward I think each of those companies will be judged on their underlying business. Google, for example, is an advertising business, and I think that is what people will focus on,” Mark Hawtin, who runs the GAM Star Disruptive Growth fund, told the FTAdviser podcast in March.

How to invest in FAANG stocks

ETFs, or exchange-traded funds, offer an economical and diversified way to invest in a variety of stocks within a particular theme.

Funds in focus: Global X Millennial Consumer ETF

The Vanguard Mega Cap Growth ETF [MGK] is one option for those looking to gain exposure to the FAANG stocks, alongside other US-listed titans. The technology and consumer discretionary sectors make up 55.9% and 22.8% of the portfolio respectively. The fund is up 19.3% in the past year through 21 July and up 29.5% in the past six months.

The Global X Millennial Consumer ETF [MILN] is another way to play the FAANG theme — the fund holds all five stocks. The consumer discretionary sector has MILN’s largest weighting (41%), with communication services (25%) and information technology (14.8%) following as of 24 July. Real estate, industrials, financials, consumer staples and healthcare make up the rest of the portfolio. The fund is up 18.6% in the past year and up 14.7% in the past six months.

The Global X FANG+ ETF [FANG.AX] aims to provide investors with results relative to the performance of the NYSE FANG+ Index. The information technology sector makes up 49.3% of the portfolio, followed by communication services (30.1%) and consumer discretionary (20.4%). The fund is up 49.6% in the past year and is up 64.5% in the past six months.