When's the Best Time for a Roth IRA Conversion?
We look at Netflix stock as the streaming pioneer prepares to launch an ad-supported plan, and how smartphone investing could hurt portfolio performance.
Ivanna Hampton: Here’s what’s ahead on this week’s Investing Insights.
You may be thinking about converting your traditional IRA because of the down market. Morningstar’s director of personal finance Christine Benz talks with Vanguard retirement specialist Maria Bruno on whether now is the time. Plus, Netflix is going from ad-free to ad-supported to attract new subscribers. Our analyst explains what it means for investors.
And, we’ll tell you how your smartphone might be hurting your portfolio’s performance.
This is Investing Insights.
Welcome to the new Investing Insights. I’m your host, Ivanna Hampton.
The new format features a mix of market news, analyst insights, and personal finance tips. Let’s begin with a look at Morningstar headlines.
FedEx is cutting costs but remains undervalued.
FedEx is planning to deliver major cost cuts. The world’s largest express package provider’s Q-1 earnings report showed mixed results. It reported an increase in revenue, but a bigger-than-expected dip in package volume. FedEx says online shopping habits are returning to normal. The global economy is softening. Morningstar thinks inflation and a lag in responding to increased demand, led to a dip in FedEx’s operating profit margin in August. The shipping giant has implemented cost cuts for fiscal 20-23. That’s expected to produce more than two-billion-dollars in savings. We don’t expect to significantly alter our 220-dollar estimate of what we think FedEx’s stock is worth. We believe the shares are undervalued.
Ford’s quarter will reflect supply chain issues.
Ford is warning its third quarter results will reflect supply chain issues that led to tens of thousands of partially built vehicles. The carmaker calls unfinished vehicles awaiting parts such as chips -- “vehicles on wheels.” It’s been an ongoing problem due to the chip shortage and other world issues. The so-called “vehicles on wheels” are high-margin light truck models including pickups. However, Ford expects them to be completed and delivered to dealerships in the fourth quarter. So, it is not changing its full-year outlook for adjusted “earnings before interest and taxes.” Ford said its third-quarter adjusted operating results will be between one-point-four-billion and one-point-seven-billion-dollars. That’s well below the Refinitiv consensus. The company says it sees inflation-related supplier costs about one-billion-dollars-higher in the quarter than expected. Morningstar is not changing its 24-dollar estimate of what it thinks Ford’s stock is worth. Ford is scheduled to report third quarter earnings on October 26th.
Smartphone investing is causing different trading behavior in investors.
New research shows that investors trade differently on their smartphones than they do on their personal computers. Morningstar behavioral researcher Samantha Lamas says that using financial institution's free apps may affect financial decisions. Perhaps we might better off sticking to things like social media posts and video calls on our phones. Researchers recently examined the trading behavior of retail investors to see if there were differences in trades carried out on a smartphone versus a personal computer. They looked at the trading activity of each investor across platforms on a monthly basis. The results suggest that the likelihood of buying riskier assets and chasing past returns went up for trades done on a phone. Lamas says making investing accessible to more people is a great accomplishment. However, excessive attention on investing without the proper education can lead to errors and return-chasing behavior. That could be driving the dangers of smartphone investing. You can read more from Samantha Lamas. A link is in the show notes.
Netflix is expected to launch a cheaper, ad-supported plan soon. The streaming pioneer will join rivals in competing for subscribers who don’t mind watching commercials if they can pay less. Neil Macker is a senior equity analyst for Morningstar Research Services and covers Netflix.
Ivanna Hampton: Hi, Neil. How are you?
Neil Macker: Good. How are you today?
Why has Netflix decided now to create a cheaper ad-supported plan?
Hampton: Well, I want to talk about Netflix, and let's get started with this first question. So, Netflix took this position where it was opposed to putting ads on the streaming platform. Why has the company decided now to launch a cheaper ad-supported plan?
Macker: I think one of the things that Netflix had was the differentiation against what we considered cable or pay TV, where ads were there, but you were still paying for the service, so Netflix was trying to differentiate themselves. One of the things that's happened to Netflix, particularly here in the United States, is they're sort of hitting a level of saturation, and they have over 70 million households subscribed to Netflix in the United States.
And so at this point, they think that their pricing, which has increased tremendously if you're a Netflix subscriber you've known it for the last decade or so, has gotten to the point where there are a number of people who are interested in Netflix, but can't afford the price point that they have even on their basic plan, which is around $10 a month.
One of the keys for the company also is the fact that they have only two levers when we look at revenue growth: one is subscriber growth and the other is pricing. Now, we look at subscriber growth in the United States, they've lost about 2 million subscribers in the front half of the year, so that's slowed down in the U.S. And then secondly, we've had a number of price increases over the last few years, and they may be hitting a ceiling on that as well. This is just another way to find a stream of revenue for them.
And another key for the company is that there have been a number of ad-supported streaming platforms, whether they're like Hulu, or completely ad-supported like Tubi or Pluto, which have also done very well in the United States. So that shows that there is a market for people who are looking for streaming content and are willing to watch ads to take a lower price or a free price at all.
How can Netflix use subscriber growth from outside the US to their advantage?
Hampton: All right, so you recently wrote about how there are more subscribers outside the U.S. than in the country. Well, how can Netflix use that to their advantage?
Macker: I think another key for the company is that if you look at where their growth is going to come from in terms of subscribers, it's obviously not the U.S. And then if we look at Western Europe, they're also getting a little close to saturation there. So a lot of their growth is going to come in what we think as more emerging or lower per capita income household at our markets, whether that's India or Southeast Asia.
So, in India, they have really been getting trounced by not only Disney, which is under Hotstar Disney there, but Amazon as well, both who are priced well below them. In order to differentiate the product, they could do an ad-supported product there, so it helps them there as well. Also in Latin America, where they're doing all right at this point, but this is another avenue of growth for them basically. So, by launching an ad-supported tier, it lets them not only capitalize on the base that they have in the United States here to get more revenue out of that and to find the marginal subscriber, but also to grow subscriber growth outside of the U.S., too, in markets where maybe $8, $9 a month, which is the pricing in let's say India, is a little high for a lot of consumers there that may still be interested in their content.
Can a streaming service compete without live sports coverage?
Hampton: What we're seeing now is streamers bringing sports onto their platforms. Amazon has Thursday Night Football, Disney has ESPN, Apple TV+ is showing pro baseball. Can a streaming service grow without live sports and can they compete without it?
Macker: I think you can compete any of this, but I do think one of the things you're doing is the sports is becoming a form of differentiation. Everybody now has original content, everybody has this, and so unless you're a Disney or let's say even an HBO and you have these long-term franchises and things like that, it's very hard when you're creating new franchises to differentiate your content. And that's true for Netflix or Apple+ or somebody else like that as well.
So, having sports is a way to differentiate, it also increases the number of people in the household that may be interested in watching the service. We know that males 18 to 48 have traditionally been relatively low consumers of what we consider general entertainment, and sports has been a way to reach those people. So, that is one of the reasons I think a lot of these platforms ... I think Netflix can compete without those live sports. We will see how the company changes their mind, given, as we talked about earlier, advertising was something that they never talked about and all of a sudden is now on the plate. While live streaming has never been something that they've talked about and that they've always said that they don't need, it could come down the line. But I think in the near time, I think it's unlikely that Netflix goes out and aggressively bids to get sports rights here in the U.S., at least.
Hampton: What do you think of Netflix stock value?
Macker: Under our star rating system here at Morningstar, we right now have Netflix as a 3-star. Our fair value estimate is $280. If the stock pulls back a little bit from the current levels, which are around $230, $235 into let's say the $210s, $220s, low $220s, we think it may be a good investible idea at that point. But right now we think the risk/reward is set that if you're not an investor already, we wouldn't necessarily recommend getting into Netflix today.
Streaming Service Stock Pick
Hampton: If you're looking at the streaming industry for other opportunities besides Netflix, where should you look?
Macker: Our top idea within sort of the streaming area right now would be Disney. Obviously, Disney has not only Disney+, but ESPN and Hulu as well here in the U.S. So we think that there's growth there. The other key for Disney versus let's say Netflix is you're buying a diversified business with a lot of sources of not only revenue, but free cash flow as well, which is important as most of these companies are burning cash to compete here.
We think Disney right now is an attractive buy. Obviously inflation will have some worries on the parks business, but we do think the parks business powers through that over the longer term. While linear subscribers are declining here in the U.S., it's still a business that generates a lot of cash with between not only ESPN, but Disney, the Disney Channel, and ABC as well. So, we think Disney is probably one of those ideas that has gotten a little cheap now, a little overworried about inflation, and we think longer term, we think Disney is a great place to put your money.
Hampton: All right. Well thank you Neil for your time today.
Macker: Thank you.Tax-free growth could appeal to some people with traditional IRAs. Converting to a Roth IRA has some trade-offs. Morningstar’s director of personal finance Christine Benz discusses that with Vanguard retirement specialist Maria Bruno.
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