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08:12

Episode 11 - Part 1

Can Netflix reach its growth goals?

Published on: January 21st, 2020 • Duration: 7 minutes

In this episode, we share how investors should position themselves with Netflix’s earnings report for Q4 2019 as new competitors continue entering into the sector and the higher volatility its stock can experience with a disappointing earnings report. We also discuss Christine Lagarde and the ECB’s stimulus package. Expectations in rate policies remain the same, and we reveal how to play the euro. In the After section, we review the University of Michigan Consumer Sentiment index as well as the report on expected inflation.

  • This is before and after from Refinitiv. I'm your host. Johanna Botta. 

    Netflix is one of the most popular and spoken about companies in the world. With one hundred and fifty eight million subscribers, they dominate the film and television space. So when their performance figures come in, it's not surprising that people pay attention. Over the past decade, Netflix stock has been among the best performers. It's grown a staggering 4,000%. It was a stock that everyone saw coming, but only a few got right. And so it's impressive performance is also a powerful reminder of how large potential investment returns from equities can be. And so with great opportunity, comes the great competition. One of those competitors is the industry giant Disney. Last November, it introduced a new streaming service, Disney Plus, which was competitively priced at six dollars and ninety nine cents a month, compared to Netflix's basic plan of eight dollars and ninety nine cents. So could Disney's relatively cheaper subscription model, and its proven catalogue of well loved content slow the current growth rate of everyone's favorite streaming service? And will the launch of HBO Max and NBC Universal's Peacock hit subscriber growth? We will have to wait and see. 

    In an effort to retain its streaming dominance, Netflix spending has ballooned to more than 18 billion a year, with the vast majority of these funds focused on original, new content. That's an increase of 3 billion from the previous year. Let's put that 18 billion dollars into context. Netflix nearest rival Amazon, has spent eight point five billion. And Disney, despite only launching last year is at 2.5 billion. And since analysts expect Netflix top line this year to be twenty four billion dollars, the firm has a long and hard road to travel before it becomes a cash profit machine. 

    But it's not all that bad. That top line growth rate is still above 25%. And for a company with a market cap of more than 100 hundred billion dollars, that commands a lot of respect. 

    [The bottom line, as always, with cases like this, subscriber growth is a key metric. And for Netflix in particular, the expansion of its international subscriber base, is a key strategy that makes it different from a rival like Amazon. Netflix says it wants 300 million customers worldwide, with most of those new subscribers expected to come from outside the US. That's almost double Disney's goal of 165 million. So if the subscriber growth number disappoints, after so many uninterrupted and impressive quarterly increases, investors might react badly. Netflix has shown that a minor slip in its numbers can prompt a quick and violent sell off.  The implied one day volatility for the first trading day after the results from Netflix is 6.88% That's about three times higher than what was expected last week for the bank earnings. Three out of the last four quarters saw Netflix trading lower the day after it released its numbers - and after the fourth quarter figures for 2018 came out, there was a 4 percent sell off. But according to a study on the Nasdaq, the stock has a tendency to bounce straight back. So if you're inclined to trade the reports on the short side, make sure you get in very quick. And if you're a Netflix bull, be ready to buy once the bounce back begins. 

    All eyes will be on Christine Lagarde this week, as the ECB is set for its second policy decision under her leadership. The current environment for growth in the Eurozone is a daunting one. Troubled by a manufacturing slump in the most critical member, Germany, growth outlooks for 2020 are at a meager 1.1%. Unprecedented stimulus has failed to spark inflation, and has the ECB set to review its own policy framework for the first time in 16 years. One key item for price stability is the concept of the 2% inflation target being reassessed as a symmetrical range, rather than a ceiling for inflation. Legarde has also been vocal about expanding the ECB's role. She wants to be able to recommend fiscal policies that sovereign eurozone governments can adopt. The ECB president also wants to expand the mandate to deal with outside topics like climate change and crypto currencies. But critics say she may be better off dealing with more immediate problems. And so with no change expected on rate policy, the main focus will be on the outlook, an existential identity of the ECB. 

    Bottom line, the ECB's stimulus package has largely failed to boost growth. But don't expect the bank to explore many potential alternatives, or examine any of the negative side effects that have arisen in its quest to hit inflation targets. A strong commitment to the existing stimulus policies should be expected. And so if there's any reasonable reaction in the Euro specifically, that could represent an intermediate pathway for price action. That being said, Euro versus the Dollar exchange rate has hit some big lows since it bottomed out in 2019 at the 109 level. And if the ECB does mention a review of stimulus measures, or discuss the harmful effects of negative interest rates, well, that could lead to a short term bullish move in the Euro as traders assume that future monetary policy will be less aggressive. However, if there is a break under 110, then it would be risky to remain to attached to the upside. 

    The headline number came in at 99.1, which was mostly in line with expectations. This meant that the equities markets, which were trading at new highs with low volatility, barely budged. For now, we are currently still in an environment where a move over 1% up or down is very rare, and the Michigan consumer sentiment number did nothing to alter that fact. One interesting takeaway, was that the inflation expectation for the next five years came off the recent lows of 2.3% and posted slightly higher at 2.5%. This cost the TLT to sell off more than 1% on the day. And this was the kind of choppy action we thought might happen in the bond market. This means that over the coming days and weeks we need to keep an eye on the 135 level in TLT. 

    There it is, Netflix and ECB in the Before.  University of Michigan, in the After. 

    Refinitiv data throughout.  

    This has been the Tuesday episode of Before and After. Please subscribe and hit the notification bell to ensure that you're alerted to all of Refinitiv's future market updates. 

    We'll see you on Friday. 

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Episode 11 - Part 2

Coming Soon

Released on: January 24th, 2020 •

  • Coming Soon

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Each week we examine major themes driving the markets and use Refinitiv’s best-in-class data to assess the risks and the opportunities for investors.