The Federal Reserve slashed the federal funds rate (overnight interest rate) by 50 basis points on Wednesday, which was double the 25-basis-point adjustment it typically uses. Inflation has fallen sharply over the past year while the unemployment rate has stayed relatively steady (although it is beginning to tick higher), which were two key reasons for the decision.
The rate cut will likely lead to lower interest rates and give consumers more disposable income in addition to a higher borrowing capacity, which can create a strong tailwind for the economy. Lower rates are especially beneficial for companies tied to the real estate sector, and companies that are sensitive to consumer spending.
With two more fed rate cuts forecast to come before the end of 2024, here's why investors might want to buy shares in Zillow Group(NASDAQ: Z)(NASDAQ: ZG) and Netflix (NASDAQ: NFLX) right now.
1. Zillow Group
The real estate market has been decimated over the last two-plus years by rising interest rates. U.S. existing home sales came in at 3.9 million annualized units in July, which is 40% below the recent peak of 6.6 million in 2021. Simply put, it became far less affordable for consumers to take out a mortgage with rates rising, and existing homeowners were reluctant to sell because they didn't want to give up their existing lower rates.
Declining home sales are a headwind for Zillow, which operates a housing "super-app" to deliver a portfolio of services to sellers and homebuyers alike. Those services include an online marketplace, home value estimates (Zestimates), virtual touring, mortgage financing, and a rentals platform. Then there is Premier Agent, a platform designed to give brokers the tools they need to connect with buyers and sellers and manage their business.
Zillow generated $1.1 billion in revenue through the first six months of 2024, which was a 12.9% increase from the same period last year. It was an impressive result given the negative state of the real estate market right now. The company's mortgage and rentals businesses were particularly strong; they generated $65 million and $214 million in revenue, respectively, with both figures rising 30% compared to the first half of last year.
Zillow stock is down 67% from its all-time high -- but it's not only because of the weak housing market. The company abandoned its iBuying business in 2021, which was its largest source of revenue. It involved Zillow buying homes from willing sellers with the intention of flipping them for a profit, but that became increasingly risky with interest rate hikes on the horizon.
Zillow is now in a rebuilding phase, and it's focusing solely on its portfolio of services. The company is on track to generate $2.2 billion in revenue in 2024 (according to Wall Street's forecast), but that's a drop in the bucket compared to its $187 billion addressable market. Falling interest rates should ignite real estate transactions, which will help Zillow capture more of that opportunity in the coming years, so now might be a great time to buy the stock.
2. Netflix
Lower interest rates could be a tailwind for Netflix as consumers will have more disposable income, which could drive more streaming subscriptions. But lower rates could also entice more businesses to try Netflix's fast-growing advertising platform in order to tap into a pool of new potential customers with cash in their pockets.
Netflix added more than 8 million new subscribers in the second quarter of 2024 (ended June 30), taking its total to 277.6 million. That represented 16.5% year-over-year growth, which was the fastest pace in three and a half years. The company said 45% of its new signups were attributable to its advertising tier (in the markets where it's available), which is priced at $6.99 per month -- far cheaper than its standard tier ($15.49 per month) and premium tier ($22.99 per month).
Netflix says the ad tier is monetizing at a slightly lower rate than its standard tier, partly because it has grown so quickly that the company is sitting on a lot of unsold ad inventory. However, that is likely to change over time because global brands like McDonald's and Coca-Cola are tapping into the platform to reach customers, and others are likely to follow.
Why? Because three years ago, streaming accounted for 27% of the time consumers spent watching TV, and that number is now over 40%. The streaming industry is now investing heavily in live programming, so that number is likely to continue growing. Netflix, for example, will stream both Christmas Day NFL games live, and it recently signed a 10-year deal to become the home of World Wrestling Entertainment (WWE), starting next year. That will include weekly live programming in addition to live special events.
In other words, businesses will soon have no choice but to spend their TV ad dollars on platforms like Netflix in order to reach their target audience.
Netflix has generated $36.2 billion in total revenue over the last four quarters, but that's a mere 6% of its estimated $600 billion addressable market, which includes streaming subscriptions, branded advertising, pay TV, and games. Therefore, it's not too late to take a long-term position in Netflix stock today, especially since lower interest rates could drive more activity across its business.
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Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Netflix and Zillow Group. The Motley Fool has a disclosure policy.
