22 April 2020

Happy Ending as Netflix Adds Record Subscribers?

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What’s happening: Netflix reported the strongest financial results in its history, after adding a record number of paid subscribers during the first quarter.

What happened: The world's largest streaming service added 15.8 million customers from January through March, surpassing its own prediction of 7 million subscriber additions. The company also issued a healthy earnings guidance for the second quarter.

Despite the robust growth, there are some investor concerns around Netflix. Although the company’s stock spiked 10% shortly after the quarterly release, it fluctuated wildly and even fell to negative territory as investors digested the complete details provided by the company. Shares of Netflix closed the trading session yesterday down 0.84% at $433.83.

What were the results: The company reported sales and earnings growth for the first quarter. Despite adding a record number of paid subscribers, Netflix missed earnings expectations

  • The company’s sales climbed 28% to $5.770 billion, beating the consensus estimate of $5.760 billion.
  • Earnings grew a whopping 107% to $1.57 per share but came in meaningfully below expectations of $1.65 per share.
  • The company’s first-quarter global streaming subs jumped 23% to 182.86 million

Why it matters: Netflix is among the handful of companies to benefit so much from the coronavirus pandemic and consequent stay-at-home orders. With an explosive growth in paid subscribers, Netflix highlighted the popularity of its latest “originals,” which included Tiger King, with a viewership of 64 million households since its debut in late March, and dating reality show Love is Blind, with around 30 million households. Among movies, Spenser Confidential recorded the highest views, at 85 million.

Netflix experienced strong subscriber growth globally and achieved positive free cash flows for the first quarter since 2014. The company guided to earnings of $1.81 per share for the second quarter, well ahead of the consensus estimate of $1.54 per share.

Although everything seems great at Netflix, there are some concerns. To begin with, the surge in paid members could be temporary. The company may witness a loss of subs as economies begin to reopen. The duration of the boom is also uncertain. While projecting 7.5 million subscriber additions in the second quarter, management warned of decline in viewing and membership growth as home confinements end.

The company’s sales and profits are impacted by strength in the US dollar, as this lowers its international revenue. The greenback is expected to remain at elevated levels in the near term.

On the other hand, the coronavirus lockdowns have impacted new content creation. The delays in adding new movies and releasing new titles could affect viewership in the months ahead.

How the shares responded: Shares of Netflix have been moving higher, despite the broader market downturn. The stock has gained 30% in a month and more than 34% year-to-date.

What to watch: Shutdowns in new content production could be a concern. Even after the economies gradually open, it will take time to produce and release new content. Moreover, Netflix faces stiff competition from Disney+ and WarnerMedia, which have massive libraries of videos.

The Markets Today

     

US stocks will be in focus today, after major indices declined to their lowest levels in around two weeks.

Context: US stocks closed lower yesterday as the surge in technology shares lost steam amid a historic downturn in oil prices. Even reports of progress in additional funding for small businesses failed to lift market sentiment.

Details: Investors were worried that the record decline in oil prices would dent employment and investment in one of the major sectors for the economy. Tuesday’s decline comes a day after WTI crude for May delivery dipped 306% to close in negative territory for the first time on record.

Technology stocks came under intense pressure, after analysts lowered their price targets for Facebook and Alphabet, warning of weakness in online advertising revenue. Facebook’s shares closed lower by 4.2%, while Google’s shares lost 4% on Tuesday.

The Dow dipped 632 points to settle at 23,018 and the S&P 500 fell 3.1% to 2,736.56, with both indices marking their lowest close since April 7. The Nasdaq 100 declined 3.5% to close at 8,263.23 on Tuesday.

Shares of Coca-Cola Co. fell 2.5% despite the company beating first-quarter earnings and sales estimates. Lockheed Martin reported strong quarterly results but reduced its full-year outlook.

In economic news, existing-home sales dropped 8.5% in March, according to the National Association of Realtors

What to watch: With the Democrats and Republicans clearing a $484 billion coronavirus relief plan for small businesses on Tuesday evening, investors are hopeful of the House approving the bill as soon as possible. US stocks are expected to rebound today, with stock futures pointing towards a higher start.

The US economic calendar is light today, with only the house price index scheduled for later in the day. The house price index rose 0.3% in January, versus a 0.7% gain in December.

Other Markets: European indices were trading higher at 9:00a.m. GMT, with the FTSE 100, German 30 and French 40 up by 0.8%, 1.1% and 0.4%, respectively.

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What else to watch today

     

Canada’s inflation rate and new housing price index, Russia’s industrial production and gross domestic product, Argentina’s leading economic index and balance of trade as well as the US MBA mortgage applications and crude oil stocks change.

 

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