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More and more people sitting watching Netflix can help revive some pet spirits on the stock market.
The company said Tuesday that many more people had subscribed to the video streaming service in the third quarter than expected. Netflix shares rose 13% in transactions that occur after normal market hours.
After the stock market has suffered a sharp decline this month, such results should help stocks to recover. The Netflix report is the first of a large technology company to have helped make the Standard & Poor's 500 Index a record last month.
Investors mapped the performance of these technology stocks by grouping them into a group called FAANG, consisting of Facebook, Apple, Amazon, Netflix and Google. Their contribution to the global market has been significant. According to Credit Suisse analyzes, the S & P 500 has risen 7.7% over the past 12 months to Monday, but without the five technology stocks, it has only reached 5.2% .
Netflix is the most expensive of the five major technology companies. This makes it a good barometer of rising stock markets. If the stock continues to rise over the next few weeks, it will be emphasized that investors still have a strong appetite for riskier companies, an attitude that could spread to other tech companies.
As Netflix's third quarter results showed, the results are good in some respects. He added seven million subscribers during the period, a figure higher than he added in the third quarter of last year. But the company also consumes large sums of money to finance its growth and borrows more to cover its shortfall. Netflix is also facing serious competitive threats, such as Disney's plans to set up its own subscription video service.
Yet, an important stock market benchmark – the price / earnings ratio – suggests that investors have almost total confidence in Netflix's ability to post strong growth profits. This ratio compares the share price to its profits. Take a business with a $ 100 commercial stock. If investors expect it to earn $ 10 per share (its net income divided by the number of shares it has issued), the price / earnings ratio will be 10.
According to S. & P. Netflix's multiple data, the ratio for the S. & P. 500 companies is currently 17.8 times higher than that expected this year. It's so much bigger because investors expect Netflix's earnings to grow faster than those of other companies.
Of course, it is still early in the reporting season – and significant disappointments can occur. Facebook is facing increasing regulatory scrutiny and is investing heavily in securing its network. Apple is trying in part to increase its revenue by selling higher-priced phones that may deter some consumers.
Outside the technological space, investors fear that President Trump's trade wars will hurt the revenues of big manufacturing companies.
However, after the start of October on the stock market, strong earnings have already helped reassure investors. Before Netflix reported on its performance, two well-known Wall Street companies, Morgan Stanley and Goldman Sachs, announced earnings demonstrating more than the banking sector is well positioned to finance economic growth.
After these reports and a few others, the S. & P. 500 jumped 2.15%, its biggest gain in a day since March.
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