Friday, July 17, 2020

Netflix Shares Dip, Despite Record Subscriber Adds

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News shaping
the markets today

     

What’s happening: Shares of Netflix plunged in extended trading on Thursday despite the video streaming company reported upbeat revenue and added a record number of new paid subscribers in the second quarter.

What happened: The coronavirus pandemic has fuelled greater interest in Netflix’s streaming service, with the closure of movie theatres and restaurants and the cancellation of live sporting events.

Given the boost in online viewership, the strong results posted by Netflix for the second quarter were widely expected. In fact, the company missed the elevated earnings expectations, causing some disappointment. Investors also seemed concerned about the company’s prospects, which sent its stock lower in after-hours trading yesterday.

How were the results: The world’s largest paid streaming service reported strong growth in its net income and revenue for the second quarter, but earnings still lagged analysts’ expectations.

  • Revenues surged to $6.15 billion, from $4.92 billion in the same quarter last year, surpassing the consensus views of $6.08 billion.
  • Net earnings came in at $720 million, or $1.59 per share, sharply rising from $270.7 million, or 60 cents per share, in the year-earlier quarter. The figure missed analyst expectations of $1.82 a share.

Why it matters: Netflix announced the record addition of 10.1 million new paid subscribers during the second quarter, exceeding analyst estimates of 8.27 million adds. The company ended the quarter with a customer base of approximately 193 million!

Netflix released over 30 movies since mid-March. The company also announced that, despite production being halted globally, it has sufficient content for 2020 and even the first half of 2021. “We want to have so many hits that you know when you come to Netflix, you can just go from hit to hit to hit, and never have to think about any of those other services,” CEO Reed Hastings said.

The company also named chief content officer Ted Sarandos as the co-CEO.

Netflix had warned in April that its growth could begin decelerating over the next few months. This did nothing to quell investor expectations of the company delivering a massive beat this quarter, which recently sent the stock to a record high and resulted in Netflix’s market cap surpassing that of Walt Disney (yes, Walt Disney as the entire conglomerate, not just Disney+).

Investors were not only disappointed with the earnings miss, but also with management projecting just 2.5 million new subscriber additions for the third quarter, versus analyst forecasts of over 5 million.

How shares responded: Shares of Netflix plummeted 9.1% to $479.58 in after-hours trading following the release of its quarterly results. The stock has gained close to 21% over the past one month and has climbed 56% over the past six months.

What to watch: Netflix is facing stiffening competition from rival Apple, Disney+ and AT&T’s WarnerMedia. This could impact results going ahead. Also, investors will keep an eye on news of the economy reopening, as this could impact viewership of streaming services. Investors look forward to production starting soon, so Netflix can attract more viewers with new content.

The Markets Today

     

US stocks will be in focus today, ahead of various economic reports scheduled for release later in the day.

Context: US indices closed lower on Thursday, with a decline in technology stocks, as investors digested mixed earnings reports and economic data.

Details: Technology shares have been the top performers this year, supported by rising demand for tech solutions due to covid-19 lockdowns. The tech sector weighed on the markets yesterday, losing more than 1%.

The US earnings season is underway and has mostly been good so far, with big banks reporting upbeat results. On Thursday, Morgan Stanley’s shares climbed around 3% after the bank reported stronger-than-expected quarterly profits, driven by strength in trading and investment banking revenue. Shares of Bank of America lost 3% despite upbeat quarterly results, due to the bank’s plans to raise its loan-loss provisions.

US economic reports were also mixed on Thursday, with initial jobless claims declining slightly to 1.3 million, but coming in higher than the estimates of 1.24 million. Other data came in better than expected, with retail sales surging 7.5% in June and the Philadelphia Fed index for July exceeding expectations.

Some downbeat consumer economic data from China and rising tensions between Beijing and Washington also weighed on investor sentiment.

The Dow Jones index dropped 135.39 points to settle at 26,734.71 on Thursday, while the S&P 500 slipped 0.3% to 3,215.57. The Nasdaq 100 declined 0.7% to close at 10,473.83 during the prior session.

What to watch: Investors await data on housing starts, building permits and the University of Michigan's consumer sentiment index. Housing starts in the US, which rose 4.3% to an annualized rate of 974,000 in May, are expected to increase to 1.169 million in June. Analysts expect building permits to rise to an annualized rate of 1.29 million in June. The University of Michigan's consumer sentiment index is projected to improve to 79 in July, from June’s reading of 78.1.

Markets will continue to assess the daily covid-19 numbers, with total infections in the US approaching 3.6 million.

Other Markets: European indices were trading lower at 8:30am GMT, with the FTSE 100 and Dax 30 index up by 0.1% and 0.2%, respectively, and the French 40 down 0.2%.

Support & Resistances
for Today

     

market snapshot

     

Futures at 0400 (GMT)

What else to watch today

     

Canada’s wholesale sales, India’s deposit growth, foreign exchange reserves and value of loans as well as the US Baker Hughes crude oil rigs.