Market Strategist
Summary: Netflix shares fall again, on weaker than expected quarterly results and a ugly show of an outlook. Although Netflix shares are down 50% from November last year, the slide show might not be over. On the flip, IBM reported a better than expected quarterly result, and is seeing an increase in business. So, could IBM shares break out of their downtrend. Plus why to also watch Disney results closely on May 11, with the market favouring experiential stocks.
Netflix (NFLX) shares fell over 20% in afterhours trade, indicating its shares will likely fall when trade resumes Wednesday. NFLX share are already down 49% from November last year. Netflix’s quarterly results and outlook were weaker than expected again; Subscribers fell 200,000. The first drop in subscribers in 10 years. Q2 subscribers are expected to fall 2 million. That spooked the market. But we have been warning of this behavioral shift for some time. Now with interest rates rising, there is an increasing reluctance to sign up, and password sharing is growing. This is pressuring Netflix’s earnings and thus its shares. The market estimates all growth metrics in 2022 to sour; with EPS growth, revenue growth and profit growth all likely to slow. So, expect broker downgrades, which could drag Netflix shares down further. To counteract this, Netflix plans to launch a lower price offering, with ads, that could add another layer of revenue.
IBM (IBM) reported a better than expected quarterly result, and an increase in business. IBM’s shares rose 2% afterhours on reporting stronger than forecast 1Q results and a brighter outlook. Q1 revenue rose 8% to $14.2b (vs $13.8b expected); after consulting revenue rose 13% in Q1 (more than expected) & software revenue rose 12% (also stronger than expected). IBM growth metrics are likely to bolster in 2022 according to market estimates. Revenue growth, profit grow, income growth and EPS growth are all expected to rise in 2022, which supports share price growth. IBM shares are also cheaper than Netflix on a price to earnings (PE) basis. IBM’s price to earnings (PE) is 16.25 times earnings. Netflix’s price to earnings (PE) is 32.5 times earnings. IBM’s business is growing and the technical indicators suggest IBM could be due for a rally up in the short term.
Another company to watch that’s emerged into tech is Disney (DIS). Walt Disney (DIS) shares are down 35% from their high but rose 3% overnight, with experiential economy stocks getting a kick. Disney results are on watch May 11. On a yearly basis, the market expects record profits, revenue growth, and earnings growth as international travel resumed. But we are cautious though, as 24% of Disney’s revenue comes from consumer subscriptions. Given the behavioral shift Disney could disappoint. What’s also interesting is Disney’s technical are suggesting the stock could be oversold and due for a small run up. But let’s see what their results bring.
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Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
