The first batch of mega-cap tech earnings arrived last night, as streaming giant Netflix (NFLX) and EV titan Tesla (TSLA) announced their quarterly reports.
At first glance, the numbers weren’t great. After all, both TSLA and NFLX stock dropped after earnings were released.
However, a detailed analysis of Netflix’s and Tesla’s earnings shows that the two tech giants actually had pretty strong quarters – and that things will only get better from here.
Plus, these two earnings reports suggest that investors should keep buying all dips in tech stocks as they emerge.
With that said, let’s take a look at our 10 biggest takeaways from NFLX and TSLA earnings reports.
TSLA Earnings: “A Tale of Two Cities”
- Electric vehicle demand remains very strong. Tesla’s core automotive topline metrics were very strong. Its affordable models 3 and Y saw huge growth of nearly 100% in the quarter. And the more-expensive models S and X also experienced a very nice growth rebound, indicating strong demand for Tesla EVs across all price points. Management also sounded confident about go-forward demand trends, maintaining a target for full-year auto volumes to increase by more than 50%. Clearly, EV demand remains very strong at the current moment, especially at Tesla.
- EV price cuts are likely done, and profit margins should start improving. The big weakness in Tesla’s earnings report was its automotive gross margin, which dropped below 20% for the first time since before the pandemic (it peaked above 30% in early 2022). This 10-plus-point drop in gross margins is due mostly to price cuts. But on the company’s conference call, management implied that they are done with price cuts. They also put a huge emphasis on cost-cutting efforts going forward. With price cuts in the rear-view mirror and cost cuts on the way, it increasingly appears that Tesla’s profit margins bottomed this quarter. Next quarter, they should start to reexpand for the first time since 2021.
- The solar industry is feeling the Fed-driven heat. Solar deployments at Tesla dropped a whopping 32% in the quarter. That’s mostly thanks to the fact that solar project developers are increasingly delaying new solar projects since interest rates are at such high levels. It does seem like interest rates have peaked. Therefore, the worst of this headwind for the solar industry has likely passed. However, the industry’s sensitivity to interest rates is something to monitor going forward.
- The energy storage industry remains on fire. While the solar industry is getting hit hard by higher interest rates, the energy storage industry is not. Tesla’s solar deployments dropped 32% in the quarter. But its energy storage deployments rose 222% in that same time. These two alternative energy industries are experiencing “A Tale of Two Cities.” And the energy storage industry’s impressive resilience to high interest rates emphasizes that energy storage stocks are a “Strong Buy” at the moment.
- Tesla stock will likely rebound from this selloff. Overall, it appears the major headwind that has weighed on Tesla stock over the past 18 months – falling profit margins – will become a tailwind next quarter. We expect the combination of resilient topline growth and reexpanding profit margins will drive TSLA stock higher in the second half of 2023.
NFLX Earnings: Password-Sharing Crackdown Shines, Ad Business Doesn’t
- The password-sharing crackdown is working to reenergize paid subscriber growth. Netflix added nearly 6 million paid subscribers in the second quarter of 2023. And management expects to add another ~6 million paid subs next quarter. Those are some of the best subscriber growth numbers the company has reported since the pandemic. And they are due to the early success of Netflix’s password-sharing crackdown efforts. Turns out, there were a lot of password-sharers out there. And most of them would rather pay a little extra than lose access to the streaming platform.
- The ad business is ramping very slowly. While Netflix’s password-sharing crackdown is going very well, its new ad business is struggling. The company continues to grow the number of members it has on its ad tiers. But the growth is proving to be painfully slow. It’s not yet robust enough to offset the lower average revenue per paid subscriber due to the password-sharing crackdown. The result? Accelerated paid subscriber growth is not yet turning into accelerated overall revenue growth.
- Netflix is in the early innings of a big growth rebound. Although Netflix’s revenue growth rates didn’t meaningfully accelerate in the quarter, they are expected to jump to nearly 10% next quarter and above 10% in Q4. In other words, Netflix’s big growth rebound will start to be reflected next quarter, mostly as a result of the ad business gaining traction. If the projections prove true, Netflix is in the first inning of a big, multi-quarter growth rebound, powered by its password-sharing crackdown efforts and ad tier ramp.
- Profit margins remain very good and stable in the streaming business. Netflix is impressively trying to execute a growth turnaround without spending an arm and a leg. And as a result, its profit margins are hanging around the 20% level. If the company can successfully pull off this growth turnaround, then it could be looking at a multi-year stretch of double-digit revenue growth with steady profit margin expansion. That’s a bullish combination.
- Netflix stock should have a strong showing over the next 12 months. We think the one glaring weakness in Netflix’s business today – the new ad tier – will improve meaningfully over the next few quarters as the macroeconomic environment stabilizes, consumer spending trends rebound, and corporations start advertising again. Therefore, we think that over the next 12 months, both of Netflix’s new growth efforts will start firing on all cylinders. Once they start working together, NFLX stock is likely to climb to new highs.
The General Takeaway
Overall, the stock market isn’t posting a great reaction to last night’s mega-cap tech earnings reports. But we think both Netflix and Tesla actually delivered very solid numbers that broadly emphasize the bull thesis for each stock.
Furthermore, we think those earnings reports underscore the current bull thesis on all tech stocks.
The simple reality is that tech was eating the world before artificial intelligence showed up to the party. Now AI is here, and it means technology firms will gobble up the global economy.
We’re confident that tech will be the global economy in five years.
Netflix will control media. Tesla will control energy. Alphabet (GOOGL) will control information. And Microsoft (MSFT) will control work.
That’s the reality we live in today.
Invest in this AI Revolution. Or get crushed by it. The choice is yours – but we think the right answer is obvious.
The Final Word on NFLX & TSLA Earnings
And what better AI stock to buy than the company that started this whole AI Boom – OpenAI, the creator of ChatGPT.
In case you missed it, OpenAI has done a lot since ChatGPT’s launch in November 2022. And the company’s valuation has already doubled!
But that’s just the start.
I truly believe OpenAI could be one of the world’s largest companies in the near future – if not the largest.
OpenAI represents the potential investment opportunity of a lifetime.
Too bad it is a startup that you can’t buy on a public exchange…
Though I did manage to unearth an investment “loophole” that allows you to take a stake in OpenAI now – before its highly anticipated IPO.
We believe this is your chance to invest in the next big thing. Like investing in Apple (AAPL) in the 1980s or Amazon (AMZN) in the 1990s, this is an opportunity you can’t afford to miss.
On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article.
