Netflix saw a big selloff on the report of its earnings yesterday. However, don’t be fooled by the market’s reaction, the data was strong. Netflix’s big narrative right now is about whether it can expand internationally. Guess what, international subscriber numbers from yesterday’s earnings blew away expectations, with 7.3m overseas subscribers versus expectations of 6.13m. US subscribers saw a slight miss, which likely caused the price decline.
FINSUM: Netflix does seem like a good buy to us. They are raising prices and growing strongly. We don’t think the price hike will deter many customers.
What should investors do about tech stocks? That is a big question. After an extraordinary run over the last couple of years, things have a hit a real rough patch. Worries about regulation loom. With that said, Goldman Sachs is optimistic on some large and midsize tech stocks. One of its high conviction picks is Netflix, which is down around 30% recently. Goldman is steadfastly a believer, however, saying “We believe Netflix represents one of the best risk/reward propositions in the Internet sector”. Other names to look at from Goldman include Expedia and Etsy.
FINSUM: What we like about these three names is that they seem the least likely to be impacted by any new privacy regulations.
The long-awaited (long-feared?) shake up of the S&P 500’s sectors will occur soon, and there is a lot of focus on how the tech sector, as traditionally defined, will change. Google and Facebook will be making the switch out of tech and into the new communications services sector. Netflix, as well as Walt Disney, Ford, and Nike will be joining them. There is some fear about the volatility that will be caused as big index trackers have to change their holdings on September 21st. Overall though, it seems like tech stocks (as traditionally thought of) will be winners, as having them distributed across multiple sectors will avoid the sector-weight limits many asset managers face.
FINSUM: Tech stocks will likely do well, but so will the companies getting grouped with them. As one analyst pointed out, AT&T and Verizon joining Google and Facebook is kind of liking outsiders getting invited to the cool kids’ party, which may help their share prices.
Morgan Stanley has put out a warning about the worryingly declining breadth of the stock market this year. The bank says that “Fewer stocks are carrying the load of the market, a sign of exhaustion and, in our view, a bad signal for further price gains”. The bank appears to be quite correct. According to the article “Bloomberg points out that Amazon.com, Netflix and Microsoft accounted for 71% percent of the S&P’s gains through early July. Along with Apple, Alphabet and Facebook, they accounted for 98% percent of the gains”.
FINSUM: Honestly that could not be a more worrying sign on breadth. 98% of gains from from 6 stocks. That does not spell widespread strength. However, earnings have been good for the last month (when the reporting period for these stats ended), so gains may have been better lately.
In what is a very odd and counterintuitive change, in just a matter of weeks, both Facebook and Google will be removed from the S&P 500’s “tech” sector. Indexes are changing up their alignments, and Google and Facebook, along with Netflix and Comcast, will all now move to a new group called “communications-services”. The changes are due to take place on September 28th and will force investors to trade in and out of billions of Dollars of holdings to realign their portfolios.
FINSUM: What this means is that the “tech” sector, and in factor no sector, will now be such a dominant component of the S&P 500. It may also reshape trading patterns, and according to some, boost volatility.