EQUITIES

Does the Netflix share plunge forecast the future for tech?

Lee Hong Wei

Singapore Sales Trader

It’s earnings season in the US again! One of the most interesting companies to report so far is Netflix, the world’s largest online content streaming company. But Netflix delivered a shock as its earnings were largely disappointing in terms of subscriber numbers. The company had expected to attract an additional 6.2 million subscribers in the second quarter but only managed to sign up 5.15m, thereby missing both its domestic and international market subscriber forecasts. Read more on Netflix from our Australia market strategist, Eleanor Creagh here.

Enlarge
Netflix is still the best-performing Fang+ stock with YTD returns of 90%. Source : Saxo Bank

This marked Netflix’s first subscriber miss in five quarters and its dismal performance dragged other tech stocks slightly slower at the opening bell. However, the NASDAQ index still managed to shrug off the negative contagion and closed off last week at an all-time. In contrast, the S&P 500 and the Dow Jones Industrial Average have been struggling to even retest their January highs.

Enlarge
Returns for the three majors indices this year - NASDAQ is the obvious winner and singlehandedly dragged the S&P 500 higher. Source: Bloomberg

With so much hype and expectation being built into such high-growth technology stocks, especially during earnings season, we have done a simple back-test on some of the most traded US tech names in Saxo and here is the result.

Strategy: You go long the stock two weeks before the earnings release (on market close) and exit the position seven days after earnings (on market close).

Enlarge
Back-test result from holdings two weeks before earnings release and exiting a week after. Source: Saxo Bank

Unsurprisingly, most of these tech names have been beating most of their quarterly earnings for the past four quarters. Twitter had an outlier performance two quarters ago as the stock enjoyed a slew of analyst upgrades after announcing its first quarterly profit in the company’s 12-year history. In contrast, Tesla showed huge earnings volatility with extreme swings in either direction in the past four quarters.

Of course such a strategy would expose the investor to unnecessary single-stock exposure so spreading out investments and diversifying would be preferable.

Of the 10 names that we have listed, you would get an average return of about 2.97% – 4.5% in the past four quarters, which seems to be a decent return for a period of just three weeks.

All in all, if you are in the camp that it will still be an earnings-beating season for these tech names, it is not a bad strategy from what we have simply back-tested. For current shareholders of these popular technology names, remember that the VIX volatility index is back in low territory, suggesting possible complacency in the market. The massive intraday plunge by Netflix serves as a reminder and a reality check of what could happen to these tech names and the global market.

Share

You can access both of our platforms from a single Saxo account.

Try the Demo
Open Account

Related Articles

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/legal/disclaimer/saxo-disclaimer)

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo Capital Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Capital Markets or its affiliates.