The Federal Reserve recently reduced the federal funds rate (overnight interest rate) by 50 basis points, which is double the typical adjustment of 25 basis points. This decision was influenced by a significant decrease in inflation over the past year, coupled with a relatively stable, though slightly increasing, unemployment rate.
This rate cut is expected to result in lower interest rates, providing consumers with more disposable income and higher borrowing capacity, thus potentially bolstering the economy. Companies in the real estate sector and those sensitive to consumer spending stand to benefit particularly from these lower rates.
With additional rate cuts expected before the end of 2024, Zillow Group and Netflix are two stocks that investors might consider buying.
### 1. Zillow Group
The real estate market has struggled over the past two years due to rising interest rates. For example, U.S. existing home sales dropped to an annualized 3.9 million in July, a 40% decline from the peak of 6.6 million in 2021. The rising rates made it less affordable for consumers to take out mortgages and dissuaded existing homeowners from selling due to their lower existing rates.
Zillow operates a comprehensive housing app offering a range of services to both sellers and buyers, including an online marketplace, home value estimates (Zestimates), virtual tours, mortgage financing, and a rental platform. Additionally, its Premier Agent platform equips brokers with tools to connect with clients and manage their business.
Despite the challenging real estate market, Zillow generated $1.1 billion in revenue in the first half of 2024, a 12.9% increase from the previous year. The company’s mortgage and rental businesses showed particular strength, with revenues of $65 million and $214 million respectively, both up 30% from the same period last year.
Zillow’s stock has decreased by 67% from its all-time high, not only due to the weak housing market but also because the company ceased its iBuying business in 2021. This business involved buying homes from sellers to flip them for a profit, which became risky with impending interest rate hikes.
Zillow is currently refocusing on its portfolio of services and aims to generate $2.2 billion in revenue in 2024, as projected by Wall Street. This is a small fraction of its $187 billion addressable market. Falling interest rates are expected to renew real estate transactions, potentially enabling Zillow to capture more market share, making it an opportune time to buy the stock.
### 2. Netflix
Lower interest rates could positively impact Netflix by increasing disposable income among consumers, which might boost streaming subscriptions. Additionally, businesses may be more inclined to explore Netflix’s growing advertising platform to reach new potential customers with enhanced purchasing power.
In the second quarter of 2024, Netflix added over 8 million new subscribers, bringing the total to 277.6 million, equivalent to a 16.5% year-over-year growth – the fastest in three and a half years. Notably, 45% of new signups were for its advertising tier (available in select markets), priced at $6.99 per month, which is more affordable compared to the standard ($15.49 per month) and premium ($22.99 per month) tiers.
The advertising tier currently monetizes at a slightly lower rate than the standard tier, partly due to rapid growth resulting in unsold ad inventory. However, global brands like McDonald’s and Coca-Cola are beginning to utilize the platform to reach their customers, with more expected to follow.
Streaming now accounts for over 40% of TV viewing time, up from 27% three years ago. The industry is investing heavily in live programming, suggesting this trend will continue. For instance, Netflix will stream Christmas Day NFL games and has secured a 10-year deal with World Wrestling Entertainment (WWE), starting next year, which includes weekly live programming and special events.
As businesses strive to reach their target audience, spending on ad platforms like Netflix is likely to increase. Netflix’s total revenue over the last four quarters was $36.2 billion, which is just 6% of its estimated $600 billion addressable market, encompassing streaming subscriptions, branded advertising, pay TV, and games. Therefore, there is substantial growth potential, and lower interest rates could enhance activity across Netflix’s business, making it a suitable time for a long-term investment in Netflix stock.
