Stocks Rally & Netflix Spikes On Great Earnings

Stocks Rally - Finally

The stock market finally skyrocketed like I expected on Tuesday. Stocks were intensely oversold heading into the day. Short term indicators signaled stocks should burst higher soon.

The performance over the next 12 months is still dependent on the fundamentals. The S&P 500 increased 2.15%, the Nasdaq increased 2.89%, and the Russell 2000 increased 2.82%. Earnings helped stocks.

Putting the cherry on top of this great performance, Netflix spiked after hours after reporting a great quarter. I will review later in this article. It’s important for the leaders to regain their mojo.

On Tuesday the NYSE had its highest advance decline ratio since July 2016. This shows most stocks did well. The S&P 500 had its best day since March.

As you can see from the chart below, after several months of nothingness, there has been a spike in large movements to the upside and downside. This is the type of activity you see in bear markets, but the fundamentals don’t indicate one is coming soon.

The VIX fell 17.28% to 17.62. The S&P 500 is now only down 4.11% from its record high. CNN Fear and Greed index is at 15 which still signals extreme fear. I’m still bullish on stocks in the near term, but one more day like today or a few slightly positive days will push me to be neutral.

Stocks Rally - Earnings season is coming at the perfect time to save the stock market.

Tech stocks led the market higher as the two best performers in the S&P 500 were Adobe and Advanced Micro Devices. They were up 9.5% and 7.3%. Every sector was up in the S&P 500. The best two sectors were technology and healthcare as they increased 3.02% and 2.9%. The worst sectors were energy and consumer staples which increased 0.87% and 1.05%.

Once again, the treasury market had very little movement as the 10 year yield increased 1 basis point to 3.16% and the 2 year yield increased 1 basis point to 2.87%, making the difference between the two yields 29 basis points. It’s almost as if all traders have decided to focus on the stock market and ignore other markets. Emerging markets also did well as the EEM ETF increased 2.51%.

Stocks Rally - Netflix Beats Estimates & Spikes After Hours

Personally, I can’t invest in Netflix because I don’t understand the valuation. That being said, I mentioned after last quarter it should go higher in the future if it continues to trade off the same results (subscriber growth).

I care about the cash burn, but traders care about subscriber growth. It’s fair to say investors are also laser focused on subscriber growth because the stock hasn’t cared about the cash burn for years.

Q3 2018 revenue was $4 billion which met estimates. EPS was 89 cents which beat estimates for 69 cents. Subscriber additions were 6.96 million.

Domestic subscriber additions were 1.09 million which beat estimates for 673,800. International subscriber additions were 5.87 million which beat estimates for 4.46 million. Starting in Q4 2018, Netflix will stop including free trials in its subscriber additions metric to subdue the volatility in the stock.

This will have a small effect, but subscriber growth will still be volatile, so I don’t expect the wild swings after earnings reports to end. On Tuesday, the stock increased 3.98%.

After hours the stock increased 11.67% because of the earnings beat. It should challenge its all-time high soon. In the after hours market it was at $386.81. It peaked at $418.97 earlier in the year.

Streaming revenue increased 36% year over year, even as international revenue fell $90 million because of currency fluctuations.

As you can see from the charts below, year over year subscriber growth only increased 0.3% and year over year revenue growth fell 6.6% from last quarter.

On the bright side, quarter over quarter subscriber growth increased from 4.1% to 5.3%.  It’s somewhat amazing to see how volatile the stock has been. The charts showing total global subscribers and ex-DVD revenue have gone from the bottom left to the top right consistently.

International subscribers have been larger than domestic subscribers since Q3 2017. Net income increased from $384 million last quarter to $403 million.

The best part of this report was that the firm expects to add 9.4 million new subscribers in Q4.

It seems that after good reports, the firm issues good guidance and after bad reports, the firm issues conservative guidance. That could be causing the heightened volatility.

The good news for the long term is EMarketer predicts 60% of Americans will use over the top services like Netflix by the end of the year. This is an increase of 3% from last year.

Stocks Rally - The pie is growing, but the competition is increasing. 

Apple will be offering free video content to users. Netflix views its competition as anything that entertains people. In that case, competition is always increasing, but that’s nothing new.

Bad news in this quarter is the cash burn increased from $559 million to $859 million. As you can see from the chart below, the trailing 12 month free cash flow is -$2.23 billion.

The trailing 12 month enterprise value to revenues multiple is 10.77. Netflix expects full year 2018 free cash flow to be closer to -$3 billion than -$4 billion. The free cash flow burn is expected to increase sequentially.

Next year’s free cash flow burn is expected to be flat compared to this year. As you can see from the chart above, content obligations increased 1.1% sequentially to $18.6 billion.

The bears will eat the chart below up for lunch because it looks like the 1990s. That's when speculators valued eyeballs instead of revenues and profits.

As you can see, Netflix has built huge brands on social media. The number of Instagram followers for the top actors in its shows have all exploded in the past few quarters.

For example, Gaten Montarazzo, star of Netflix original “Stranger Things”, had his follower count grow from 0 to 8.8 million since July 2016.