21 October 2020

Netflix Streams Upbeat Revenue, But Shares Slide

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What’s happening: Shares of Netflix Inc. fell in extended trading on Tuesday despite the streaming service reporting stronger-than-expected revenues for its third quarter.

What happened: Netflix’s stock is among the top gainers this year, with the company benefitting from people remaining at home amid the pandemic.

With stiffening competition in the streaming world and easing covid-19 restrictions, Netflix recorded its slowest quarterly subscriber growth in four years.

How were the results: The No. 1 streaming service reported growth in both sales and profits for the third quarter.

  • Revenues grew to $6.44 billion, from $5.25 billion in the same quarter last year, and exceeded the consensus view of $6.39 billion.
  • Net earnings stood at $790 million, or $1.74 per share, up from $1.47 per share in the year-ago quarter. The figure fell short, however, of market expectations of $2.13 per share.

Why it matters: As the covid-19 infections began spreading across the world, Netflix added a whopping 15.8 million subscribers from January to March. The company had issued a warning, however, that this phenomenal growth could ease in the second half of the year.

Hoping to add more subscribers, the streaming giant released Enola Holmes, Emily in Paris, and The Devil All the Time in the third quarter. The move did not get the results Netflix was hoping for, as it faced rising competition from Walt Disney and AT&T’s WarnerMedia restructuring its business to put up a tough fight. Meanwhile, the resumption of live sports also affected Netflix’s subscriber growth last quarter.

The company added only 2.2 million paid subscribers globally in the quarter, missing the consensus forecast of 3.4 million and even its own highly conservative projection of 2.5 million.

What helped Netflix’s bottom line the slowdown in production due to the pandemic. Cash flows rose, as the company did not bear any costs making new content while continuing to charge subscription fees. Netflix recorded free cash flows of $1.1 billion, versus a negative figure of $550 million in the year-ago quarter.

For the fourth quarter, management projected 6 million subscriber adds globally. Although this is far better than what was achieved in the third quarter, it came in below the market expectations of 6.51 million.

“The state of the pandemic and its impact continues to make projections very uncertain, but as the world hopefully recovers in 2021, we would expect that our growth will revert back to levels similar to pre-COVID,” Netflix said in a letter to shareholders.

How shares responded: Shares of Netflix plummeted almost 6% to $495.40 in after-hours trading following the release of quarterly results. The stock has added more than 62% since the beginning of the year, with around 5% gains in the past three months.

What to watch: With Europe and some US states reimposing restrictions, investors will keep an eye on an improvement in Netflix’s subscriber adds. Markets will also monitor competition from Apple, Comcast, Amazon, AT&T and others and the impact of this on the popularity of Netflix’s streaming service.

The Markets Today

     

Crude oil will be in focus today, ahead of the EIA’s (Energy Information Administration) report on crude inventories.

Context: Oil futures ended higher on Tuesday to record their first rise in the past four sessions. US benchmark prices settled at their highest level in around seven weeks.

Details: Oil futures had traded lower for most part of the day, amid growing concerns over the resurgence of covid-19 cases in Europe and the US likely impacting energy demand. Various European countries have reimposed fresh restrictions in the face of rising infections.

As an indication of the lower demand, the API (American Petroleum Institute) said yesterday that US crude stockpiles had risen by 584,000 barrels in the week ending October 16.

Despite these setbacks, crude prices settled higher ahead of the expiration of the WTI’s (West Texas Intermediate) November contract on Tuesday. The prices also found some support from expectations of a decline in US crude stockpiles.

WTI crude for December delivery gained 1.6% to close at $41.70 per barrel on the NYMEX (New York Mercantile Exchange). November’s contract added 1.5% to settle at $41.46 per barrel on Tuesday. Meanwhile, December’s Brent crude gained 1.3% to settle at $43.16 a barrel on ICE Futures Europe.

Natural gas prices enjoyed some support from expectations of lower temperatures in the US this winter. November natural gas climbed 4.2% to end at $2.913 per million British thermal units on Tuesday.

What to watch: Investors await EIA’s data on crude stocks. Analysts expect domestic crude supplies to drop 1.9 million barrels last week. Gasoline supplies are expected to decline 1.6 million barrels, while distillate supplies are projected to fall by 3 million barrels.

Other Markets: US indices closed higher on Tuesday, with the Dow Jones index, S&P 500 and Nasdaq 100 up 0.40%, 0.47% and 0.33%, respectively.

Support & Resistances
for Today

     

market snapshot

     

Futures at 0400 (GMT)

What else to watch today

     

Mexico’s unemployment rate, Canada’s annual inflation rate, retail sales and new house prices, Argentina’s leading economic index as well as the US MBA mortgage applications and Fed Beige Book report.

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