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Hi fellow Finimizer, here's the news you need to know for January 19th. Reading time is 2:58 minutes.

☕  Finimize'd over a cup of tea at Tribeka, Grieskai 2, 8020 Graz, Austria.

Boom, Netflix Won’t Chill

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What’s Going On Here?

Netflix’s stock jumped about 8% to a new record high (tweet this) following the release of its financial results on Wednesday, which showed its subscriber growth beat expectations by a big margin.

What Does This Mean?

It was generally thought that Netflix had come close to fully penetrating the US market; however, it’s still managing to grow, adding almost 2 million new users in the most recent quarter. More importantly perhaps, it’s significantly ramping up international user growth – and doing so much more quickly than expected. It added about 5 million new international subscribers versus expectations of 3.7 million, which is a big beat. The popularity of original programs, like The Crown, helped drive growth.

Why Should I Care?

The bigger picture: Netflix shows the power of big data.
Netflix has a huge amount of data on people’s viewing habits because it knows exactly when you stop watching and, conversely, which shows you keep coming back to. Multiply those data points across its millions of users and it has a pretty good idea of what makes a good TV show. Add in billions of dollars in funding for new shows and you get a powerful potion of captivating original programming – which, in turn, drives more subscriber growth… and more data.

For the stock: Netflix is steadily getting more profitable.
The company expects 2017 to show significant “margin expansion,” which means it is expecting to make more profit for every dollar it gets paid by subscribers. This is partly because of the scalability of its content: one show can appeal to a huge number of viewers in many different countries. Balanced against this positive factor is a stock price that is already factoring in investors’ high expectations. Netflix will probably have to improve its margins and continue its growth, lest it disappoint investors.

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Pearson’s “Textbook” Problem

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What’s Going On Here?

Pearson, the world’s largest publisher of educational material, saw its share price fall 30% on Wednesday after the company once again told investors that it would make less profit than expected. That’s a huge selloff!

What Does This Mean?

Pearson is in the business of selling textbooks, but demand for textbooks has been hit hard by a shift to digital resources. Unsurprisingly, Pearson has already been trying to change its focus to digital products, but it’s failing to make up for the decline in its traditional print business. Falling enrolment in US colleges is not helping, hurting sales of both Pearson’s traditional and digital products. Increasing use of textbook sharing services are also eating into Pearson’s sales.

Why Should I Care?

The bigger picture: Investors do not like surprises – and they really don’t like surprising cuts to their cash payouts.
In another blow to investors, Pearson said that it would decrease its annual cash payment to shareholders (a.k.a. dividend). As Pearson’s dividend declines, it risks losing a dedicated investor base that targets companies that pay a high dividend (typically called “dividend funds”). Also, Pearson’s CEO had recently talked up the company’s prospects, so Wednesday’s announcement might have caught some investors off-guard, making them more likely to sell the stock.

For the stock: The turnaround plan is to double-down on selling digital products.
Last year, Pearson sold the Financial Times and its stake in The Economist in order to raise cash. On Wednesday, it said it also wants to sell its 47% stake in publisher Penguin Random House. The cash is meant to help the company weather the current storm while it tries to turn itself around by focusing even more on selling digital educational resources. Investors, however, appear to be sceptical of this strategy, as reflected in Wednesday’s stock selloff.

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#FINIMIZEQUOTE

“Our democracy is threatened whenever we take it for granted.”

- Barack Obama (The 44th President of the United States in his farewell address)

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Q&A

RE: 2017 Looks Good For Banks

Sam asked:

“Why are rising interest rates good for banks when it’s actually the spread between the rate that banks pay their depositors and what they charge for loans that actually impacts their profit?”

“You’re correct: it’s not always as simple as ‘increasing interest rates are good for banks.’ To a large extent, banks benefit the most when the difference increases between long-term interest rates (typically influenced by government bonds that expire in 10 to 30 years time) and short-term interest rates (e.g. those that expire in less than 2 years) – and that’s been happening recently. A greater difference between these two rates allows banks to charge more for long loans like mortgages, while not increasing the rate they pay out (e.g. to depositors) by as much.”

WHAT WE'RE READING

CFA Institute is a global organization for investment professionals. Their Investment Foundations Program delivers a clear and substantive understanding of the industry. Finimizers can access the course’s study materials for free here – it’s a great resource for those interested (you will need to create a CFA Institute login). finimizemylife

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