Where Netflix goes, Big Tech may follow
SAN FRANCISCO (Reuters) – Netflix Inc.’s quarterly results on Monday may offer an advanced preview of whether Facebook Inc., Amazon.com Inc. and other heavyweights behind much of the US stock market’s record-breaking rally can keep delivering.
Wall Street on Friday shrugged off a looming US government shutdown and propelled the S&P 500 to a record high as investors focused on upcoming quarterly reports.
Many of the largest companies – Microsoft Corp., Apple Inc., Alphabet Inc. and Amazon.com – have outperformed the broader market in the first 13 trading days of 2018, with investors betting strong earnings growth will justify tech valuations at their highest levels in a decade.
Netflix, which is due to report its quarterly results on Monday after the stock market closes, has jumped nearly 15% this year, outpacing the S&P 500’s 5% increase.
Netflix’s 53% surge in 2017, along with rallies by Amazon.com and Silicon Valley’s largest tech companies, helped propel the stock market to new highs.
“Netflix is going to be a great early indicator of risk appetite for these high-volatility growth names,” Wedbush trader Joel Kulina said. “Netflix’s drivers are very company-specific. But if this stock can deliver, there’s no reason this whole market can’t keep going higher.”
The Los Gatos, California-based company faces increasing competition from streaming services, including Amazon.com’s Prime Video, and moves by traditional media companies. But investors remain optimistic about its ability to beat expectations.
Its stock recently traded at 95 times expected earnings for the next 12 months, versus AMC Entertainment, at 44 times earnings, and Time Warner Inc., at 14 times earnings, according to Thomson Reuters data.
Underscoring investors’ willingness to pay premium prices for fast-growing stocks, Phil Blancato, head of Ladenburg Thalmann Asset Management in New York, recently helped a client buy $1.5 million worth of shares in Facebook, Amazon.com, Apple, Netflix and Google parent company Alphabet as investments for his grandchildren.
“I said, ‘You’re crazy.’ But he was very direct. He wanted the FAANG stocks,” he said, using a widely used Wall Street acronym for those companies.
Analysts on average expect S&P 500 technology companies to deliver a 15.9% increase in earnings for the December quarter, according to Thomson Reuters I/B/E/S. Earnings for the entire S&P 500 are seen rising 12.2%, bolstered by lower unemployment and fatter wages.
Technology investors during the reporting season just under way are also eager to hear company executives explain how their bottom lines will be affected by corporate tax cuts passed by Congress in December and whether they plan to repatriate overseas profits.
Apple said last Wednesday it would make about $38 billion in one-time tax payments on its overseas cash. Investors want to know how much of the $252b. held abroad Apple will bring home and potentially spend on dividends, share buybacks or acquisitions.
In its third-quarter earnings released on October 16, Netflix reported it had added more global subscribers than analysts expected. In response, its stock hit a record high in after-hours trade before dipping the following day.
In October, Netflix hiked US prices for the first time since 2015, potentially providing more cash to produce original content but also increasing the risk of losing customers.
Netflix has forecast adding 6.3 million subscribers worldwide in the December quarter, which would bring its global customer base to nearly 115.6 million.
Analysts on average expect a 32.5% jump in revenue to $3.28b. and net income of $186.3 million, up 179%. Analysts expect earnings per share of 41 cents.
Up 42% over the past 12 months, the S&P 500 information-technology index is trading more than 19 times expected earnings, its highest since 2008, according to Thomson Reuters data.
Facebook will post quarterly results on January 31, followed by Amazon. com, Apple and Alphabet on February 1. Nvidia, which surged 81% in 2017 and replaced Qualcomm as the most valuable US chipmaker after Intel Corp., reports on February 7.