Stocks and Securities
Stocks surged higher on Tuesday, ignited by strong earnings at the open and then fuelled by a resurgence in the heavily-weighted information technology sector (3.0%) throughout the day. The S&P 500 rocketed through its 200-day moving average, closing 2.2% higher and reducing its October loss to 3.6%.
As for the other major averages, the Dow Jones Industrial Average jumped 2.2%, the Nasdaq Composite surged 2.9%, and the Russell 2000 advanced 2.8%. The Dow and the Nasdaq both closed above their 200-day moving averages, but the Russell 2000 did not.
Investor sentiment was buoyed after several financial and health care giants reported upbeat earnings.
Investment banks Goldman Sachs (GS, +3.0%) and Morgan Stanley(MS, +5.7%) helped boost the financial sector (+1.6%) after reporting better-than-expected top and bottom lines. Asset management firm BlackRock (BLK, -4.4%) weighed on the sector, though, after missing revenue expectations. BlackRock’s pain worsened when CEO Larry Fink said that the company saw more than $30 billion of institutional non-ETF index equity outflows that were driven by client de-risking. Mr. Fink added that he thinks clients will continue to de-risk.
Health care sector (+2.9%) components Johnson & Johnson (JNJ, +2.0%) and UnitedHealth (UNH, +4.7%) contributed to the group’s strong performance after better-than expected results. The health care sector is the second-best performing group this year with a 2018 gain of 12.5%; tech leads with a gain of 13.9%.
The tech sector “returned to form” on Tuesday when investors flocked to the high-growth assets that some considered to be oversold on a short term basis. Adobe Systems (ADBE, +22.66) had a very strong performance after it reaffirmed fourth quarter guidance and said it expects FY19 revenues to be up 20%. The software company led the S&P 500 with a gain of 9.5%.Likewise, chip stocks outperformed, as the Philadelphia Semiconductor Index climbed 3.3%. Notable gainers included Intel (INTC, +3.2%), Qualcomm (QCOM, +3.0%), and NVIDIA (NVDA, +4.4%). However, today’s impressive performance brings the PHLX Index’s yearly gain to just 2.4%.
Adding to Tuesday’s gains was the communication services (+2.3%) sector, led by FANG members Alphabet (GOOG, +2.7%), and Facebook (FB, +3.4%). Conversely, laggards in the all-green sector standings were energy (+0.9%), consumer staples (+1.1), and utilities (+1.2%). The defensive-oriented utilities sector remains the only sector in October with monthly gains (+2.1%).
Takeaway from Netflix (NFLX) earnings
After hours Netflix shares soared up to 15 percent after the company beat earnings estimates during its latest quarterly report on Tuesday. Netflix is showing accelerating growth as the company expands. Streaming revenue grew 36 percent year-over-year during the third quarter, though international revenue was down $90 million due to year-over-year impact from currency. Revenue: $4 billion vs. $4 billion estimated, per a Refinitiv consensus estimate. Earnings per share (EPS): 89 cents vs. 68 cents estimated, according to consensus estimates. Subscriber additions: 6.96 million
The company is projecting it will add 9.4 million net subscribers during the fourth quarter.
Netflix will also be relying on its TV and film studios to make more of its own content, rather than licensing content. Shows including “Stranger Things,” “Big Mouth,” “The Ranch,” “Bright,” “Godless,” “The Kissing Booth,” “3%,” “Dark,” “Sacred Games” and “Nailed It” were created by Netflix studios. It also licenses shows that may have appeared on TV or in theaters before like “Shameless” or “Friends,” as well as obtains first-window rights to series like “Orange is the New Black” and “13 Reasons Why.”
What’s important, we believe, is a double-digit sequential rise in quarterly operating profits per subscriber. Back in 2012, Netflix had 27.6 million paid subscribers, an operating profit of $50.0 million or $1.81 per subscriber and a market cap of $5.1 billion — a multiple of 102 times its operating profit.
Fast forward today, Netflix has 130 million paid subscribers, an operating profit multiple of 99 times. If that multiple keeps moving lower with rising subscribers base, we believe Netflix stock will hit $1,000 by this time 3 years from now.