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Episode 11: Netflix and US home sales

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.

Woman stands in empty studio. On the back wall is a fluctuating bar chart
08:12
  • 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. 

Episode 11 - Part 2

Will U.S. home sales continue to surge higher?

Published on: January 27th, 2020 • • Duration: 6 minutes

In this episode, we explore how U.S. home sales have shown strong growth over the last two quarters—but will upcoming reports for December home sales continue that trend? We explain how tightly correlated Lennar’s stock has been to the surge in home sales and how investors should position themselves. We then turn our attention to the U.S. Manufacturing PMI, its need for improvement, and the astonishing performance of Honeywell’s stock. In the After section, we review Netflix’s earnings report that came out earlier this week.nflation.

Woman stands in empty studio. On the back wall is a fluctuating bar chart
06:34
  • This is Before and After from Refinitiv. I'm your host Johanna Botta. 

    2020 could be the year that the corporate fairytale that has carried the US economy, hands over the baton to that old pillar - housing. 2019 ended with clear momentum in US housing figures. And the last report, which detailed November's numbers, indicated a double digit year over year growth. With house hunters having been energized by mortgage rates that are at a near three year low, at under 4 percent, and a tight job market helping would be owners qualify for a mortgage, construction has been much stronger than a year ago when we were a good 50 basis points higher on average 30 year rates. The Atlanta Fed has residential investment slated at 3.9% growth for the fourth quarter, after 4.6% the previous quarter. These were the best back to back quarters since 2016 /2017. 

    Bottom line, it feels like we've seen this movie before! With everyone focused on non-asymmetrical risks and the stock market, will housing get shaky again? With 4% of the GDP accounted for in residential housing, and another 12.5% Of GDP in housing and utility services, we do need to pay close attention. Expectations are for 728,000 new home sales for the month of December. A lofty number if judged by the last ten years. And it's no surprise that the housing index in the US has surged on the strong fundamentals. 

    Consider Lennar - the second largest holding at 4.65%, in the XHB, which is a homebuilder ETF. Its stock price has reflected the moves in new home sales. Priced in the low 60s at the time of this recording, Lennar is still 10% off the highs made in early 2018, while new home sales are at their highest level since 2007. 

    Needless to say, Lennar, which is off to a great start this year, is up 13%, making it the second best XHB ETF, and definitely one to watch. 

    A strong number followed by selling in Lennar could mean a short term top has been made in the index. On the other hand, a weak number under the expected 728,000, and you'd expect to see Lennar go down sharply on the day. Strength in both scenarios means this stock will be a market leader for the first quarter of 2020. But under 60 on Lennar as an instant reaction, could accelerate selling in the intermediate term. Otherwise, expect Lennar to set sights on the highs of 71.82 made almost exactly a year ago. 

    One area of the economy that needs to show improvement in 2020 is manufacturing. This is true worldwide, but in the US it represents the missing piece for the bullish economy case. Expectations are for the PMI reading to come in at 52.5 in line with the prior month, and above the 50 level, which indicates that the economy is still growing. The last reading in December showed an uptick in the year, ending strong, after a mid-year slump. And though the numbers were stronger, there was a lingering, cautious tone due to geopolitical instability. 

    Like many other economic conditions and the stock market, one would never assume that the US manufacturing powerhouse Honeywell would be trading at all-time highs. But such is the strange contrast of 2020. Honeywell is involved in such a broad suite of products and industries that it makes the company an interesting bellwether for U.S. manufacturing. From jet engines to footwear, Honeywell manufactures just about everything! Honeywell should then be a stock to watch on the back of the Markit Manufacturing PMI. 

    The Bottom Line? Honeywell is trading at an expanded price earnings of over 20, which is in line with a multiple expansion of the broader S&P. But we need to see growth beginning before it picks back up. The key question is - will economic reality jump up and trend towards what Honeywell stock price is screaming - or as resilient as a US economy appears to be, will the stock come back to the reality that manufacturing remains vulnerable? Let's look at where Honeywell stock traded last summer when the manufacturing PMI was making year lows right above the 50 mark. 

    The stock has rallied 18% since then, while the manufacturing numbers have only marginally improved. The risk in the short run is to the downside, the caveat being the PMI comes in super strong. 

    So Netflix beat their earnings per share estimate by a lot, coming in at 1.30 versus estimates of 0.53. This was also significantly better than their EPS for this quarter last year, which came in at zero point three. And they slightly beat the revenue estimates of five point four, five billion, getting five point four seven billion. The stock sold off 2% in the after hours reaction, quickly traded back to unchanged, but then underperformed a falling market on Thursday, perhaps giving us a glimpse of how the stock will trade over the coming days. 

    But nevertheless, it was all about the subscriber numbers. Netflix only added 420,000 U.S. subscribers versus the expected 659,000. And more importantly, Netflix also revised down first quarter subs lower to seven million new subscribers, versus what was expected to be seven point eight-two million. All in all, a mixed report. It's good to see the company achieving earnings targets, but could competition be slicing up the pie? We'll just need to wait and see. 

    There it is. U.S. and New Home Sales and Markit Manufacturing Data in the Before. Netflix in the After. 

    Refinitiv data throughout. 

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