To The Moon

The Fed has significantly cut the federal funds rate by 50 basis points, with further reductions expected before the end of 2024. Lower interest rates could reduce borrowing costs, providing consumers with more disposable income and greater borrowing capacity, thus fueling economic growth.

These rate cuts particularly benefit real estate companies and consumer spending-sensitive firms, like $Zillow(Z)$ and $Netflix(NFLX)$ .

1. $Zillow(Z)$

In July, the annual sales of existing homes in the U.S. dropped to 3.9 million, down 40% from a peak of 6.6 million in 2021. Higher rates have diminished buyers' borrowing power, while existing homeowners are reluctant to sell due to lower rates.

This drop in home sales is detrimental to Zillow. The company’s real estate "super app" offers various services for buyers and sellers, and provide a Premier Agent platform designed for real estate agents to connect with buyers and manage their business.

In the first half of 2024, Zillow reported revenue of $1.1 billion, up 12.9% from the previous year. Given the current sluggish real estate market, this performance is impressive. Their mortgage and leasing businesses performed particularly well, generating $65 million and $214 million, respectively, both up 30% year-over-year.

Zillow's stock has plummeted 67% from its historical high, not just due to the weak housing market but also because the company exited its iBuying business in 2021, which was its primary revenue source.

Now, Zillow is in a rebuilding phase, focusing on its service offerings. Wall Street predicts the company will generate $2.2 billion in revenue in 2024, still far below its potential market size of $187 billion. As interest rates decline, it should boost real estate transactions, allowing Zillow to seize more opportunities in the coming years.

$Netflix(NFLX)$

Lower interest rates are a boon for Netflix, as consumers will have more disposable income, leading to increased streaming subscriptions. Moreover, reduced rates could attract more corporate clients to their rapidly growing advertising platform.

In Q2 2024, Netflix gained over 8 million new subscribers, bringing its total to 277.6 million—a 16.5% year-over-year increase and the fastest growth in three and a half years.

The company noted that its ad tier accounted for 45% of new sign-ups. While the monetization of the ad tier is slightly lower than that of the standard tier, the influx of global brands like $McDonald's(MCD)$ and $Coca-Cola(KO)$ is likely to encourage others to follow suit.

Why is this happening? Three years ago, streaming comprised only 27% of consumer viewing time; now, it exceeds 40%. The streaming industry is investing heavily in live programming, which is expected to continue growing.

For instance, Netflix will stream NFL games on Christmas Day and recently signed a 10-year deal with WWE. In other words, companies will soon have to spend their TV advertising dollars on platforms like Netflix to reach their target audiences.

Over the past four quarters, Netflix generated a total revenue of $36.2 billion, but this only represents 6% of its estimated $600 billion market (including streaming subscriptions, brand advertising, pay TV, and gaming).