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Disney vs. <span style="color:#E50914">Netflix</span> streaming subscriber growth

Data: Company filings; Chart: Jared Whalen/Axios

Disney's stock slipped 2% Thursday, despite reporting streaming subscriber gains the day prior, as investors begin to weigh whether the company's massive investment in content is sustainable. 

Why it matters: Disney's streaming division still isn't profitable and its losses widened last quarter. Wall Street is worried about whether the company's long-term streaming strategy is most lucrative to investors. 

By the numbers: Disney's streaming division, which includes Disney+, Hulu and ESPN+, lost $887 million last quarter, up from $290 million a year ago. 

Executives blamed those losses on rising production costs for original content on Disney+ and Hulu and higher sports rights costs at ESPN+. 

"I'm not sure that's the best use of their capital," senior media analyst Michael Nathanson told CNBC. "I kind of wonder if they set targets themselves that are not achievable or will be too expensive to get there."

Nathanson said the company's push to scale its streaming services broadly will impact its ability to make more money from hyper-loyal users and fans. 

Stat of play:  Disney on Wednesday said it now has over 200 million paid subscribers across all of its services globally, bringing it a big step closer towards closing in on Netflix's longtime streaming lead. 

The company attributed continued subscriber growth on its investments in content, which it says will total around $32 billion this year, down just slightly from initial projections of $33 billion. 

Be smart: Disney's stock typically trades on its streaming value proposition, even though the company makes most of its money on parks and resorts and its broadcast and cable networks. 

Although the company showed continued growth in its domestic parks operations and cable networks, investors were looking for a signal that Disney's streaming momentum will continue. 

Executives said they believe they're still track to reach its long-term subscriber goal of 230 million to 260 million total subscribers by 2024, and that subscriber additions in the next two quarters will likely exceed the last two. 

But they noted that because the last two quarters came in better than expected, subscriber adds for the next two quarters won't be as pronounced comparatively to the last six months. 

The big picture: Netflix's massive selloff last month underscored Wall Street's expectation that streaming services begin to drive profit. 

Netflix's slowed subscriber growth shows how much the company's business model is dependent on spending big on original content, which makes it harder to grow profits. 

What to watch: The next frontier for growth for Netflix and Disney is introducing an ad-supported tier. Ad-supported tiers can increase subscriber numbers, as well as the average revenue per user. 

Netflix initially said it was weighing offering a cheaper, ad-supported subscription plan over "the next year or two," but it told employees this week that they could come as soon as the end of the year, per The New York Times.  

While Disney neglected to share more details about pricing and timing, Chapek did reiterate his confidence in Disney's ability build a strong advertising operation for Disney+, given its success and technical resources building ad-supported tiers for ESPN+ and Hulu.

Disney stock slides despite streaming gains

Disney+ still isn't profitable and its losses widened last quarter.

Disney

Stock market

Media

After a record economic expansion, the coronavirus pandemic sent the U.S. economy into a recession as unemployment soared to staggering heights. The country now faces urgent questions about how much stimulus is needed for reeling consumers and businesses, and what a recovery might look like.

Economy & Business

Axios Markets

A stablecoin called TerraUSD (UST) imploded this week, causing billions of dollars in losses and raising the question of why any cryptocurrency — or even a government-issued fiat currency, for that matter — would ever want to have its value pegged to some other currency. 

Why it matters: Nowadays, most currencies float freely against each other. Historically, however, that's something of an anomaly. Indeed, as recently as 1971, even the U.S. was part of the Bretton Woods system that pegged all currencies to a gold standard.

The big picture: Pegs get introduced when market forces generate a level of volatility that makes planning and industry needlessly difficult. 

Countries implement pegs to ensure stable prices, both for their citizens and for any industries that export or import goods. Certainty and predictability are good things. 

Then, if the peg ends up too far from fundamentals, it can become harmful and brittle, and eventually break. In the case of UST, there were no fundamentals, so it was prone to break at any time. In the end, UST lasted less than 20 months. 

A peg that's stood the test of time: The Hong Kong dollar weakened dramatically in the summer of 1983, causing panic selling of the currency, and panic buying of supermarket goods. 

The solution: The local currency was pegged to the U.S. dollar at a rate of 7.8 to 1 on Oct. 13 of that year. It's stayed at that level ever since — more than 14,000 days and counting. (Since 2005, the exchange rate has been allowed to fluctuate within a narrow band, from 7.75 to 7.85.)

How it works: The Hong Kong Monetary Authority (HKMA) has a $466 billion Exchange Fund, which it uses to buy unlimited Hong Kong dollars at the 7.85 level. Conversely, the HKMA will sell unlimited Hong Kong dollars at 7.75. 

The dollar peg means that the HKMA can't set its own monetary policy. Whatever interest rate the Fed sets is perforce the overnight interest rate in Hong Kong, too. 

The bottom line: It's highly improbable that financial speculators could break the Hong Kong peg. China's leadership, on the other hand, could do so at any time, if Sino-American relations deteriorate further. 

Why currency pegs crack

The case of TerraUSD raises the question of why any cryptocurrency would want to have its value pegged to some other currency.

Cryptocurrencies

From the Valley to D.C., Big Tech players like Facebook, Google and Amazon are under more scrutiny than ever as new technology develops and privacy and antitrust concerns grow in lockstep with companies’ ambitions.

Technology

Traders are hitting the sell button on virtually every key asset class — including stocks, bonds and bitcoin — ratcheting up the fear factor on Wall Street and sending the S&P reeling to its weakest levels in a year.

Why it matters: The Federal Reserve is laser-focused on taming inflation, and that’s making markets increasingly jittery as the U.S. economy sends mixed signals on growth. 

While we've seen the economy contract last quarter, the jobs market remains as robust as it’s ever been.

Meanwhile, however, China’s extraordinary push to tamp down COVID infections via lockdowns has sparked increasing global economic fears.

This time it’s really different: The Fed’s pivot from super-accommodative to a “fire and brimstone” approach (in the words of JPMorgan global strategist Marko Kolanovic) to price pressures has sparked market volatility for weeks. But spiking bond yields, which are reacting to inflation and Fed expectations, underscore how government paper has relinquished its traditional role as a safe-haven when stocks are in turmoil.

Rising yields are hammering tech stocks, with the Nasdaq cratering by over 4 percent and many high-flying tech shares setting new 52-week lows.

Bitcoin fell to its lowest levels since 2021, zeroing in on $30,000 in price value — more than half its record high last fall — according to Yahoo Finance data.

Perhaps more tellingly, oil tumbled by more than 6 percent to $102, and is now well below multi-year highs.

What they’re saying: Treasury Secretary Janet Yellen said on Monday that markets were functioning in an orderly way, but that there was “potential for continued volatility and unevenness of global growth” in the face of the pandemic. Still, Wall Street analysts are somewhat less sanguine.

“There remain several risks that could upend the expansion long before the Fed turns restrictive or unsustainable imbalances emerge,” wrote JPMorgan’s Kolanovic on Monday. “The biggest near-term risk comes from China,” he added, calling the fallout from Beijing’s zero-COVID strategy “alarming.”

But wait — it gets worse. Jay Hatfield, CIO Jay Hatfield, chief investment officer Infrastructure Capital Management wrote that the government's push to reduce its balance sheet “will collapse the pandemic era bubble in crypto currencies, money losing tech companies and meme stocks." 

Thought bubble: With markets in panic mode and dark clouds enveloping China, the Fed's job engineering a soft landing for the economy is getting tougher by the day.

Markets in free fall as investors sell everything

While the economy contracted last quarter, the jobs market remains as robust as it’s ever been.

Illustration of a siren alarm encasing a stock trend line which climbs and then stagnates

Economy

The dollar hits a 20-year high against the yen

The surge against the yen came after the Bank of Japan stuck to plans to keep interest rates low.

Finance

U.S. dollar to Japanese yen exchange rate

Economic output in selected sectors, by quarter

Data: U.S. Bureau of Economic Analysis; Chart: Thomas Oide/Axios 

Details from Thursday's first-quarter GDP report show a snapshot of how the world has changed over the last few years.

Why it matters: The COVID-era focus on home-buying, home optimization and remodeling is an example of the remarkable changes that occurred in the American economy and individual behavior over the last couple of years.

State of play: Residential fixed investment activity — a category of the GDP report that includes everything from constructing new homes and apartment buildings to remodeling and alterations — surged in the aftermath of COVID and has remained above pre-pandemic levels. 

In contrast, recreation services activity — which encompasses gambling, museums and movies, among other activities — plummeted at the onset of the pandemic and still hasn't completely recovered. 

What we're watching: How long it takes for the flurry of investment in housing to die down in the face of sharply higher mortgage rates.  

Charted: America's at-home economics

Residential fixed investment activity surged in the aftermath of COVID and has remained above pre-pandemic levels.

Housing

The stock market is down, but extreme bets live on. 

Why it matters: The pandemic-era bull market — now come to an end — was fueled in equal part by YOLO and FOMO. 

The former — "you only live once" — was based on the idea that in a world of zero interest rates, the most likely road to wealth was not a slow accumulation of compound interest, but rather a moonshot that involved gambling everything on a low-probability but ultra-high-return bet. 

The latter — "fear of missing out" — was based on the idea that everybody else was building wealth in the markets, and that if you didn't jump in yourself, you'd lose your best (and possibly only) chance at getting rich.

Be smart: YOLO started out as a zero interest rate policy phenomenon. FOMO is a product of the bull market. Both have now come to an end, but YOLO is proving more resilient.

A bear market can boost YOLO activity, because the only thing worse than seeing your money go sideways is watching it go down. But bear markets tend to kill FOMO stone dead.

The big picture: Elon Musk is the YOLO king, deeply at home among YOLO memelords. For them, if y0u're not risking everything, you're not really living. 

The purpose of risking everything is not to get rich — Musk, famously, doesn't live like a rich person — but rather to achieve impossible goals. Those include making the internal combustion engine obsolete, colonizing Mars, or creating a workable public square based on an absolutist free-speech vision.

By the numbers: Over the full course of the pandemic, YOLO stocks have massively outperformed FOMO stocks. 

Since January 2020, the promise of Tesla has rewarded investors with a 955% gain, while anybody who bought and held GameStop over that period is sitting on a 2,010% gain. (Of course, there are countless YOLO investments that went to zero in that time; that's how YOLO works.)

Over the same period, tech giants like PayPal and Netflix have actually fallen in price — they're down 23% and 42% respectively. Other losers include Disney, Intel, and — at least until yesterday's earnings report — Facebook. 

The bottom line: Sometimes, losses only serve to create a desire to gamble even bigger, in an attempt to win them all back. In a world filled with crypto hype, YOLO isn't going anywhere. 

YOLO beats FOMO in the pandemic-era bull market

Over the full course of the pandemic, YOLO stocks have massively outperformed FOMO stocks.

Traders work on the floor of the New York Stock Exchange (NYSE) on April 28, 2022 in New York City.

Traders work on the floor of the New York Stock Exchange (NYSE) on April 28 in New York City. Photo: Spencer Platt/Getty Images

Percentage difference from all-time high for select stocks

The recent decline in Tesla stock, possibly caused by worries about Musk's successful bid for Twitter, has raised concerns that he barely has the liquidity to raise the $21 billion he needs to provide in cash to pay for his new platform.

By the numbers: If you exclude stock that Musk has pledged to secure loans, the value of his freely-sellable Tesla shares is only about $11 billion. In order to find the extra $10 billion, he might have to exercise some of his stock options. That's expensive, since he'd need to pay income tax, rather than lower long-term capital gains tax, on such sales.

What goes down can go down much further: Tesla stock is about 33% below its all-time high. Yet Facebook has performed much worse than that, while rival electric carmaker Rivian is down more than 80%. 

A continued decline in Tesla shares could cause margin calls and a lot of forced selling by Musk, which in turn would tend to drive the stock lower still.

Lauren Silva Laughlin and Gina Chon of Reuters Breakingviews have already gone so far as to predict that Musk will never own Twitter.

The bottom line: Musk is that rarest of billionaires: one who's always keen to put his wealth to use, rather than just watching it rise, or giving it away. 

A $44 billion purchase, however — almost certainly the largest amount of money ever spent by a single human on anything — might be too large a bite, even by Musk's standards. 

Tesla's stock could fall much further

A decline in Tesla stock has raised concern that Elon Musk barely has the liquidity to raise the $21 billion he needs to pay for Twitter.

Elon Musk

Big Tech

Netflix's stock sunk more than 20% in after-hours trading Tuesday after the streaming giant said it lost 200,000 subscribers in the first quarter — its first subscriber loss in a decade. It also missed investor expectations on revenue. 

Why it matters: Netflix's stock was already down more than 40% year-to-date, in large part due to increased competition and slowed user growth forecasts from Netflix for Q1.

Details: "Our revenue growth has slowed considerably as our results and forecast below show," Netflix said in the opening line of its note to shareholders, blaming its "relatively high household penetration," for creating "revenue growth headwinds."

EPS: $3.53 vs $2.89, according to a Refinitiv survey of analysts.

Revenue: $7.78 billion vs $7.93 billion, according to a Refinitiv survey of analysts.

The big picture: Netflix in March began to test a crackdown on password sharing as a means to increase subscriptions. 

On Tuesday, the company said that in addition to its 222 million paying households, it estimates that Netflix is being shared with over 100 million additional households not paying for the service, including over 30 million in the US and Canada — its most lucrative market. 

Go deeper ... Netflix's earnings over the past year:

Netflix stock plunges on first subscriber loss in a decade

The streaming giant said it lost 200,000 subscribers in the first quarter — its first subscriber loss in a decade.

Photo Illustration by Rafael Henrique/SOPA Images/LightRocket via Getty Images

Netflix

 Data: FactSet, Goldman Sachs; Chart: Axios Visuals 

The S&P 500 is cruising toward a 5% gain in March, which would be its best month since October.

Why it matters: The turn higher for the market — after it was down by more than 10% — underscores what attentive investors have come to understand over the last couple of years. The stock market isn't the economy.

Flashback: Remember when the economy was in an all-out collapse in the aftermath of the pandemic? Food bank lines miles long? Unemployment that was quite literally off the charts?

After the initial shock, stocks rocketed higher.

Between March 23, 2020, when stocks hit bottom, and Dec. 31, 2020, the S&P 500 jumped an astounding 68%.

Why? Government actions. The Federal Reserve cut interest rates to near zero and Congress spent gobs of money to keep the economy from imploding. (Stock markets like free money.)

Today, conditions are much different. Inflation is high. The Fed is raising rates, and little additional government stimulus is expected.

Yes, but: We're still seeing the same kind of stocks that led the market higher in 2020 — so-called long-duration stocks that benefit from lower interest rates — leading the market higher right now.

Goldman Sachs' basket of such stocks, an assemblage of health tech, software and IT companies, for the most part, is up nearly 7% this month, beating the performance of the S&P.

The intrigue: This may seem a little surprising as long-term interest rates — essentially the yield on the 10-year Treasury note — are still going up. In theory, that should hurt these stocks because they're supposed to be sensitive to rising rates.

My thought bubble: One way to square the circle? The yield curve.

The market's romp began in mid-March. That's right around the time the Fed started hiking rates and signaling that it would keep doing so in order to pull inflation back — even if that hurt the economy.

That was also when the yield curve really started to crumble. (Translation: The gap narrowed between shorter-term and longer-term rates.)

The bottom line: Essentially, stock market investors may be betting that the Fed's going to hike interest rates hard, which could cause a recession — and eventually return the economy to the sort of slow growth, low-inflation environment that served tech stock investors well for over a decade.

The stock market's fine with rising recession risk

The turn higher for the market underscores what investors have come to understand over the last couple of years.

A monitor with stock market information on the floor of the New York Stock Exchange on March 15.

Axios Pro Rata

Venture capital is about playing the long game, and that strategy may soon pay off in China.

Driving the news: China's government last week suggested it will loosen some of its restrictions on overseas listings by local companies, which began last summer with the DiDi debacle.

Some of this is still amorphous, with China just pledging more "predictable regulation." 

China also says that it's working with the U.S. on a cooperation plan that clear a path for the sorts of security audits that D.C. demands and that Beijing detests.

In short, China wants to reverse its tech sector's flagging fortunes, and also to stabilize Hong Kong. This may even apply to DiDi, whose stock soared nearly 60% on Friday (albeit from a ridiculously low base).

When China began its crackdown, we noted that it was a stark reminder of the risks investors take when backing companies that live under authoritarian rule. But venture capitalists chose to accelerate instead of yield.

VCs invested nearly $114 billion into Chinese companies in 2021, per PitchBook.

That's well above the 2019 or 2020 totals, and just shy of the 2018 record.

Look ahead: The big question now is what happens to the big backlog of Chinese companies that postponed IPOs originally planned for late 2021. The macroenvironment has changed a lot in the intervening months, which means Chinese regulators may have caused some companies to miss their opportunity. 

Well, at least for now. As a venture capitalist might advise: "Just wait a bit longer, because the winds will shift again."

Go deeper: China is making new billionaires much faster than the U.S.

China's IPO shift after DiDi debacle

China's government suggested it will loosen some restrictions on overseas listings by local companies

Illustration of a keyboard with one key as the Chinese flag.

China

China is becoming the most formidable rival America has faced, and the risk of confrontation with Russia, North Korea or Iran still looms. Authoritarians are rising, the chaotic Afghanistan exit revealed the limits of U.S. power, and the pandemic, climate change and other critical challenges continue to pose grave threats.

World

Data: YCharts; Reproduced from Razum Capital; Chart: Axios Visuals

Tesla is now more valuable than the combination of the world’s top seven traditional auto makers, despite only delivering half a million cars this year. 

Why it matters: Anyone searching for evidence that the stock market and the real economy are not the same thing, should look no further.

Tesla’s frenzied ride in the capital markets culminated on Monday in the company being the largest entrant ever be included in the S&P 500, the main benchmark stock index.  

Tesla’s true believers are not paying for actual performance, but they are betting on Elon Musk as a visionary and the potential upside in the still nascent electric vehicle market.

The merits of that investment thesis diverge greatly from the current state of affairs in the automotive industry, and the broader economy. 

Reality check: The overall equity market’s meteoric rise in the face of a U.S. economy that will end 2020 3% smaller than it started the year, is just the latest example of the economic reality decoupling from stocks.

The equity market backdrop is a simple case of buyers needing to “invest in the market you have, and not the one that you want,” says  Quincy Krosby, chief market strategist for Prudential Financial. 

“It is a market that has been engineered by the liquidity of central banks. ... It is surprising how far we've come, and that includes Tesla," Krosby says.

Driving the news: While Tesla mania was once limited just to those who back Musk, after today anyone invested in an S&P index fund is essentially being forced along for the ride.  

After months of anticipation and active buying, technical pressure pushed the stock down about 6% after its S&P 500 debut.

That's happening alongside a broader market decline tied to a new wave of coronavirus concerns in the UK.

What they’re saying: “Tesla shares are in our view and by virtually every conventional metric not only overvalued, but dramatically so,” wrote Ryan Brinkman, a JPMorgan analyst, in a research note. 

In the past two years, Tesla’s shares have risen more than 800% as analysts have increased average 12-month price targets more than fourfold and simultaneously lowered earnings per share estimates annually through 2024, Brinkman notes. 

Yes, but: Tesla makes cars, but they could also be categorized alongside pure tech or electric vehicle companies. It is early in the "golden age of EV playing out globally," says Dan Ives, an analyst at Wedbush Securities.  

Ives estimates that EV sales will grow from 3% of overall auto sales to 10% by 2025. "Many of the naysayers are probably the same individuals that thought LeBron wasn't going to be a good basketball player 15 years ago.” 

Tesla mania vs. economic reality

Evidence that the stock market and the real economy are not the same thing.

Business

If Trump's presidency is about to end, an unprecedented golden era for big businesses could end with it.

Why it matters: Thanks to support from the president, Congress, the Supreme Court and the Federal Reserve reaching levels not seen in recent history — if ever — large companies have done a lot of winning.

What we're hearing: Trump's policies have "created a favorable business environment," U.S. Chamber of Commerce president Suzanne Clark tells Axios in an email. 

"We’ve seen some promising economic and fiscal policy developments over the last few years." 

Between the lines: Businesses have benefited most from the people Trump put in charge. 

The Fed: The success of big corporations is perhaps best evidenced by the stratospheric level of U.S. companies' stock value relative to GDP, and that's been thanks in large part to Trump's handpicked Federal Reserve chairman Jerome Powell.

The market capitalization of U.S. publicly traded companies has grown from around 200% of U.S. GDP in 2016 to a record high 266% of GDP this year — meaning corporations are worth roughly two-and-a-half times the value of everything produced and consumed by the U.S. in a year.

In 1995, the number was about 80% of GDP.

"Big businesses are outperforming the broader economy," Julia Coronado, president of MacroPolicy Perspectives, tells Axios. 

"One of the things that's interesting is that market capitalization didn't get knocked on its ass in the current recession. It's at an all-time high." 

The Supreme Court: With Trump's first Supreme Court nominee, Neil Gorsuch, in place the Chamber of Commerce went 9-1 in cases where it supported business interests in the 2017-2018 term, its most lopsided record in six years. 

With Brett Kavanaugh on the Court in the 2018-2019 and 2019-2020 terms, the Chamber's victory rate declined to around 65% but included a historically high number of cases involving big business and many more where businesses had lost in the lower court.

"Only twice did the Court agree  to review decisions favoring business interests—and in both cases the  Court affirmed those pro-business rulings," notes the Constitutional Accountability Center, in reference to the 2018-2019 period. 

The Court's recent pro-business rulings included pushing employees into arbitration over job complaints, making it harder for employees to join class action lawsuits, limiting protections for whistleblowers and striking down the ban against sports gambling.

Don't forget: The 2017 Tax Cut and Jobs Act passed by a GOP-led Senate and House reduced corporate taxes from 35% to 21%, but it also eliminated the graduated corporate tax rate schedule and the corporate alternative minimum tax, disproportionately benefiting big companies which downsized their tax bills to record low levels.

Trump also cut funding for the IRS by $239 million in 2017 — the combination led to business taxes in 2019 accounting for the lowest portion of federal revenue on record, dating back to 1929. 

Business tax revenue as a proportion of GDP dropped by the most of any industrialized country in 2018, reaching just 1.1%.


Reproduced from Haver Analytics via MacroPolicy Perspectives; Chart: Axios Visuals

State of play: Trump's trade wars and tariffs have hurt small businesses and manufacturers but big companies managed to largely pass the costs of tariffs onto smaller suppliers. 

And since the coronavirus pandemic hit, large U.S. companies have boosted their cash holdings and many have increased their market share as smaller competitors have fallen by the wayside.

Even some of the companies specifically targeted by Trump have seen their fortunes rise. 

Amazon CEO Jeff Bezos has seen his personal fortune swell by $121 billion since Trump became president, despite a divorce. 

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