Netflix (NFLX) and Tesla (TSLA) kicked off the third-quarter earnings bonanza Wednesday night, and it was a tale of two cities.
On the one hand, Netflix reported blowout numbers and NFLX stock soared. On the other hand, Tesla missed estimates and TSLA stock crumbled.
Listen to the Market: NFLX vs TSLA
Put your ear to the market and buy shares of NFLX, sell shares of TSLA.
Last night’s numbers proved that Netflix is in the midst of an impressive business turnaround, while Tesla is in the midst of a discouraging business breakdown.
Netflix reported its best subscriber growth rate since early 2021, powered by strong adoption of its new ad service and very little resistance to its recent password-sharing crackdown.
Meanwhile, Tesla reported its weakest vehicles sold growth rate since the depths of the COVID pandemic, hindered by rising interest rates diluting demand for cars. Its solar business also reported one of its lowest-volume quarters in years, while revenues on the energy storage business grew by about half the rate of its previous quarter.
At the same time, Netflix is hiking prices on a sticky subscriber base, while Tesla is cutting prices to attract new customers, resulting in quickly accelerating revenue growth at Netflix, and crumbling revenue growth at Tesla.
Netflix is also reigning in spend, which is allowing profit margins to push higher and is unlocking a lot more free cash flow. Tesla, though, continues to spend like crazy to grow, resulting in major profit margin compression and free cash flow destruction.
The differences between the two firms’ earnings reports last night could not be starker.
No wonder one stock is up more than 10% and the other is plunging.
But what explains this difference?
The Interest Rate Difference
Interest rates are sky-high right now, and those rates are really hurting Tesla but having no impact on Netflix.
Tesla – which sells cars worth tens of thousands of dollars and installs solar and energy storage systems worth hundreds of thousands of dollars – is a very interest-rate-sensitive business. Its products are mostly purchased through financing contracts. The higher interest rates go, the more “expensive” its products become. The more “expensive” its products become, the less people want to buy them.
Netflix, though, sells subscriptions that cost about $15 per month. No one finances a Netflix subscription. Therefore, higher interest rates don’t really impact Netflix’s demand. At 0% rates, people will buy Netflix. At 5% rates, they’ll buy it, too. This is a rate-resilient business model.
That’s why Tesla in the midst of a business breakdown, and Netflix is in the midst of a business turnaround.
One is impacted by interest rates. The other isn’t.
This is a microcosmic preview of what’s to come this earnings season.
Companies that run business models largely immune to higher interest rates will report great results this quarter. Companies that run business models very sensitive to higher rates will report bad numbers this quarter.
It’s that simple.
So – the best investment strategy now is to buy rate-immune stocks and ditch rate-sensitive stocks.
Buy the Netflix’s of the world. Sell the Tesla’s of the world.
Do you know the difference?
If not, click here, and we can tell you about some really high-quality, rate-immune stocks to buy right now.
On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article.
