After posting a 500-point gain on Tuesday, volatility reigned on Wednesday as the Dow Jones Industrial Average fell over 250 points as third-quarter earnings season continues. Netflix (etftrends.com/quote/NFLX) handily beat analyst expectations, but it wasn’t enough to tow the Dow out of the red.
Netflix’s earnings per share of 89 cents bested the 69-cent estimate of analysts, while subscriber additions came in at 6.96 million–1.09 million additions domestically versus the 673,800 estimated and 5.87 million added internationally versus estimates of 4.46 million.
“We’re getting a little better on the forecasting,” said Netflix CEO Reed Hastings. “I think by focusing going forward on paid [net adds]we’ll be able to be a little more accurate and focus on the fundamentals.”
Netflix will turn inwards and begin relying on producing its own original content as opposed to licensing external content. Analysts feel this is the best option going forward for the video streaming giant in terms of sustaining its business model.
“Our own original shows tend to be more valuable than licensing someone else’s shows in later windows,” Chief Content Officer Ted Sarandos told analysts. “So when we invest in an original show, we find, we’re having a better payback in terms of people watching and appreciating Netflix and valuing their subscription. So that’s why we’re leaning in that way.”
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Some analysts were forecasting that rising interest rates could be a factor that might hamper the company’s future growth.
“Longer term, we expect Netflix will continue to invest and market behind its ramping global original programming and we raise long-term marketing expenses [as a percent]of revenues by ~100 [basis points versus our]prior forecast,” Morgan Stanley analyst Benjamin Swinburne said in a note. “We also raise the incremental cost of debt based on rising interest rates, with Netflix still needing to raise an additional ~$5 [billion]of debt over the next two years before reaching positive free cash flow in 2021.”
Treasury note yields were partly to blame for last week’s stock sell-off as benchmark notes went on a weeklong ascent, pushing to new highs that caused investors to fret. Today, benchmark yields ticked lower with the 10-year note settling in at 3.15, while the 30-year note was at 3.326 as of 11:00 a.m. ET.
Thus far, third quarter earnings have been positive with almost 90% of S&P 500 companies beating analyst expectations, based on data from Factset. Nonetheless, other major indexes were down with the S&P 500 shedding 20 points and the Nasdaq Composite down just under 70 points.
Helping to drag the indexes down was data that housing starts by fell 5.3% in September, which was more than analyst expectations. Per Marketwatch, “Builders broke ground on fewer homes in September, and applied for fewer permits to start future projects, another signal that residential construction faces daunting headwinds that will limit the supply of new housing stock.”
“The pace of single family home building has slowed over the past 4 months,” said Peter Boockvar, chief investment officer of The Bleakley Advisory Group, in a note. “Price inflation along with higher mortgage rates has turned off interested buyers.”
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