Netflix (NFLX) is scheduled to report its third quarter earnings today, which could give the tech sector a much-needed revival, particularly after last week’s trading session that saw the Dow Jones Industrial Average lose as much as 1,300 points in two days. The video streaming giants was caught up in last week’s tech sell-off, but a positive earnings result could help bring tech back into pole position as it has been leading the recent, record-breaking bull market run.
However, some analysts are forecasting that rising interest rates could be a factor that might hamper the company’s future growth. Netflix is trying to slough off a subscriber growth slump that is causing some analysts from Goldman Sachs and Raymond James to slash their 12-month price targets for the stock.
“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.”
Related: Small Cap Volatility ETF Fading Against Large Cap Opponent
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. The rising yield contagion eventually made its way to the stock market, hurting several tech giants like Netflix.
Rising rates are not the only thing Netflix has to worry about with respect to future growth as more competitors enter the video streaming market segment, such as Apple, AT&T, Walmart and Costco.
“While these services offer varying levels of direct threats to Netflix’s subscriber base, they indicate that the arms race for content is not likely to ease any time soon,” said Nomura’s Mark Kelley.
In their last quarter reporting, Netflix’s subscriber growth missed expectations, but a number of stronger content offerings may help their final third quarter numbers.
“We note that the content slate that came online during 3Q was better than 2Q’s, including new seasons of big-name series such as Orange is the New Black, Ozark, and BoJack Horseman, which gives us increased confidence that the company can achieve its 3Q subscriber guidance,” said Kelley. “Furthermore, the most recent Sensor Tower app download data indicated strong international growth, with India being the fastest growing region globally.”
For more investment strategies, visit Rising Rates Channel.