Consuming the internet

As discussed yesterday, most US earnings previews for this week see it as a weak one - industrial, natural resources and consumer discretionary and staple stocks are hitting the newswires and are all at the mercy of consumption.

MacDonald's lost 2.7% overnight as earnings fell well short of forecasts. The second quarter earnings saw an EPS of $1.38 versus consensus of $1.41 as its European division continues to see sluggish growth as a problem facing corporations all over the world over.

What is becoming clearer is internet (and software) based companies are struggling this earning season. We saw Google well down on Friday as add uptakes stalls. Yahoo! also saw revenue well down with year-on-year results down by as much as 7%, but earnings did much better; which raises the question; are earnings masking the real picture?

The suggestion is that they are; Netflix, the online movie subscription giant, absolutely smashed year-on-year earnings and revenue at 49 cent EPS and revenue of $1.07 billion, versus 11 cents and 889 million this time last year - so why did the market shed the stock by more than 6% in aftermarket?

Consumption is the answer; new subscribers at Netflix were down almost 7% on most estimates. Consumption through the internet is one of the fastest changing markets ever invented. We are past the issues faced by companies in the dotcom bubble of the early naughties, but when the CEO of the largest TV and movie streaming company states, ’the risk of U.S market saturation only grows as we do’, this leaves Netflix only one option: Expand earning and profit margins, through increased price action. In the internet world this can be a death knock; consumption of internet products can change with the wind and price is a major determinate.

On the other side of the internet coin, Apple will release its quarterly earnings results tonight. As another company deriving its earnings from consumption, leads from major competitor Microsoft would suggest downside risk.

The poor uptake of MSFT Surface tablets was always on the cards as the company was facing an uphill battle for market share from two very established products in the iPad and the Galaxy notepad. However, the question for Apple is whether the iPad has gained here, or has Samsung continued to punch holes in the US giant’s market share? If so, we could see Apple continuing its downward shift. Using the results from the iPhone versus the Galaxy as a guide, we would expect the latter to come true.

Consumption from a digital point of view is not exactly equitable to Australian listed companies we know. The ASX has a very small technology space and the stocks that are listed are more in the processing of internet consumption such as NextDC or Technology One, which provides a niche and specific business and business model.

It is a space that will be watch very carefully over the coming years as corporations continue to adapt to the constantly changing consumer habits of the internet.

Moving to the open, we are calling the ASX 200 up 12 points to 5014 (+0.23%) as the ASX takes further heat on the return to the yield trade. Telstra continues to slide under the radar and has now added just under 7% since the low in June, and is now back at the $5 level. If it can once more punch through the four year high, $5.15 is the next level of resistance.

BHP looks set to punch higher again as the London listing inches higher, and its deposit receipts suggests the stock should add 44 cents today to $34.56 (+1.3%) as once more iron ore remains above $130 a tonne. 

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