Market Overview

13 July 2020

Netflix May Take the Box Office by Storm at the Beginning of the Earnings Season

Global stock futures jumped again in overnight trading after the weekend as the big earnings season of corporate reports starts this week. PepsiCo, which is included in the Nasdaq 100 list, has already reported its second quarter figures on Monday before the market opening. The earnings per share (EPS) of $1.32 on revenue of $15.95 billion beat average analysts' forecasts, as the polls on Investing.com predicted EPS of $1.26 on revenue of $15.35 billion. It's a good sign at least for other consumer sector companies, and also one of the reasons why the Nasdaq 100 futures soared above 10,900 in early trading hours.

Major banks and financial groups like Citigroup, JPMorgan are going to publish their Q2 2020 results on Tuesday. Since many big banks are burdened with the risks of comparatively low financial solvency or even possible bankruptcy of some borrowers, the banking sector is clearly not the leader of the present global stock rally, but rather is trailing somewhere near rearguard. Financial institutions, however, can make good money on the growth of shares and bonds in other segments of the stock market, but their own assets are not yet in such high demand among the investors community.

Therefore, this week most attention will most likely be given to the corporate report of the Netflix streaming giant since it is just the "party of five" including Facebook, Apple, Amazon, Netflix and Google shares (the so-called FAANG group) that sets record after record for market capitalisation. Netflix is one of the leading "stay at home" companies that have already been crowned winners after the acute phase of the pandemic, and it continues to be one of the market’s favourites.

Although much was written about the prospects for growth in Netflix shares at the beginning of the year, and then later in the spring during the pandemic, including discussions about forecasts of growth to $420 or $450 per share, the reality exceeded all expectations. A fantastic gain of almost $100 per share since the beginning of July, including an 8.5% sharp increase in value only last Friday with a peak above $555 per share, may seem a somewhat premature step even for avid optimists among the FAANG-bulls. After such a spurt, the prices could either jump much higher, driven by inertia, or the shares have a clear risk of being subjected "unexpectedly" to a wave of strong profit taking for just three days before the Q2 2020 report, as the initial targets of many investors are not only fulfilled but exceeded. Of course, any possible declines may be bought again later, but at first it may briefly undermine prices.

At the same time, Goldman Sachs increased its price target for Netflix now to $670 versus the previous target of $540, which has been successfully reached, CNBC reported citing the analyst note. According to the note, Netflix may jump by more than 30% again over the next year, and many analysts expect another large number of subscribers in the second quarter that may be reported by the company this Thursday, July 16. Goldman Sachs’ forecast is an expected net addition of at least 12.5 million new subscribers after the streaming entertainment service added 15.77 million net subscribers in the first quarter. “While the thesis ‘if you haven’t subscribed by now, you never will’ is an easy rhetorical, it fails to capture the reality of Netflix’s earlier stage markets and a dramatically changing world that is pushing changes into every corner of consumer behavior,” the note said.

Netflix shares are up almost 60% in 2020 so far. The company has 22 buy ratings, nine holds and only four sell ratings, with an average price target of $481.87, according to data compiled by Investing.com. The average EPS forecast, according to Inesting.com, is $1.82 vs $1.64 in Q1 2020, which comes after $0.56 in Q2 2019. A new record revenue of $6.09 billion is expected vs $5.75 billion in Q1 2020 and after $4.93 billion just one year ago.

Other FAANG leaders will report later during a month period. As for the rest of the market, including exchange traded funds (ETF) or just simple S&P500 futures following investments, positive expectations prevail, but there are also beliefs that the market is too mixed. “The overall rally is still very narrow...and several of the high flying mega-cap stocks are becoming overbought (and more over-valued),” Matthew Maley, chief market strategist at Miller Tabak, said in a note on Sunday. “Therefore, we have to wait to see if the key resistance level on the S&P is indeed broken to the upside before we can confirm that another rally leg in the broad stock market has begun.”

Corporate profits are expected to fall by 44% in the second quarter, which would be the biggest drop in quarterly earnings since Q4 2008, according to Refinitiv data. The market is ready for this and is unlikely to be disappointed to an extent that may cause any large-scale selloffs. Some lagging assets may even take a breath and then accelerate growth, but more expensive shares may temporarily fall in price due to the effects of repositioning searching for better entry prices.


Disclaimer:

Analysis and opinions provided herein are intended solely for informational and educational purposes and don't represent a recommendation or investment advice by TeleTrade.



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