🤦🏽 netflix ffs

Corporations aren’t meant to trade.

But they can turn their balance sheets into profit centres.

One way of doing this pretty easily is being aware of the FX markets.

Let’s say you’re a US business that has a load of clients abroad.

These clients pay in various currencies but you charge the same price in dollars…

Pounds, euros, rupees, zlotys etc etc.

But, oh no!

The dollar has fallen in value!

Well for a business like this, it means their revenue gets hit.

Unless you hedge the exposure to these price movements out.

Companies tend to do this in two ways.

1) Run a forward contract strategy where they fix the price they purchase or sell currency at for a period in the future.

This locks in their rate so they don’t really need to worry about the whims of the FX market affecting their revenue.

2) They will run options strategies.

Example, they might run simple calls on EURUSD where they’ll pay the options premium for protection to higher Euro valuation relative to the dollar.

If it expires in the money, it means their cost of the adverse price move is merely the relatively small premium they paid for the position.

Btw, any of you guys and girls running businesses with FX exposure who would find it helpful to hedge out this risk, get in contact since we can help formulate bespoke strategies for you to use to mitigate revenue swings.

For businesses dealing heavily in foreign currencies, this is super important.

Most businesses tend to hedge out only a partial bit of their flow in this way so if the market does indeed go in their favour, they’re making money from the FX basis.

But…

Enter Netflix.

Now on this morning’s call in the Fink Community, I’d mentioned Netflix could be in for a Blockbuster earnings, mainly because they historically left all their FX unhedged.

Until now…

What I didn’t realise is back in 2023, they started running a layering strategy whereby they hedged 50% of their foreign revenue…

Which means in their next earnings, they are probably forgoing a few hundred million in added revenue, which is usually the make or break for earnings report beats these days!

If they had left it unchanged as they had for years, it’s likely their revenue uplift could be nearer $400m due to the decline of the dollar through 2025.

Is this the right way to think about it though?

Well, no.

As I said at the start, corporations aren’t really in the trading game, although being unhedged certainly is…

But I think there’s a case to be made that for corporations, better currency advisory can be applied.

For a firm of Netflix’s size, it can cost a huge amount…

Because get this…

If Netflix had kept their unhedged strategy, in 2024 they’d have made $1.4bn extra…

INSANE - but get this…

It tends to even out eventually, but a bit of optimisation can go a long way.

For small and medium sized business owners though, it still matters big time.

If you haven’t hedged FX exposures before, it is something worth looking at since there can be a good revenue uplift.

Drop me an email to chat.