Q2 Earnings Kickoff: Netflix Disappoints, WFH Stocks Under Pressure?
Updated: Jul 24, 2020
Stay-at-home stocks have had a tremendous run since March lows, but with expectations through the roof, are earnings bound to disappoint?
As Q2 2020 earnings kicked off last week, Netflix shares tanked over 12% in after-hours trading on Thursday after reporting an EPS miss and weak Q3 guidance. According to CNBC, the streaming giant’s EPS came out to $1.59, much less than the expected $1.81, but still beat on Revenue with $6.15 billion vs the expected $6.08 billion. Despite investor reactions, these financials mark tremendous year-over-year growth with a 165% EPS increase and 25% Revenue increase, driven by an additional 10 million subscribers in Q2 bringing Netflix's global total to 193 million subscribers. However, Netflix’s Q3 growth forecasts are far less with only 2.5 million expected subscriber additions while analysts were predicting 5.27 million.
This news suggests a slowdown in the work-from-home market trends that have been observed since the March lows. Netflix itself is up almost 70% in those 4 months, with other names including Zoom up 125%, Shopify up 190%, and DocuSign up 185%. Even QQQ, the mega-cap Technology ETF is up an incredible 50% in that time. This global shift to a stay-at-home society in response to COVID-19 has been so powerful and lasting, that the world’s largest ETF providers including BlackRock, VanEck, and Direxion have launched or are in the process of launching work-from-home ETFs.
Even so, Netflix’s news added to a nasty week for the technological sector as long-term tech leaders got hammered. The tech-filled Nasdaq was down over 2% on the week with Tesla down 15%, Amazon falling 10% in its worst week since February, and Netflix down 18% at one point but finishing the week down 12%. Some argue this is due to rotation from growth to value stocks as investors secure gains while others point to positive vaccine news as possibly signaling the end of the stay-at-home trend.
Regardless, the coming weeks’ earnings reports will be crucial in justifying tech’s massive run-up and in defining Q3 expectations for investors. Microsoft is expecting to report on Wednesday with Alphabet, Amazon, Apple, and Facebook on deck for the following week. These 5 companies have been called “market movers” in the past, and rightfully so, with their enormous impact on broader markets. In addition, many disruptive names and sector-leaders are also set to report this week including Snap, Tesla, Chipotle, Skyworks, Twitter, American Express, and Verizon.
With the economy facing, arguably, the worst quarter since the Great Depression, expectations could not be higher for the few companies who have thrived in this new environment and pushed the market to pre-COVID levels. If tech companies follow in Netflix’s path and are unable to meet the extraordinary expectations laid out by analysts, broader markets could see enormous volatility as investors reevaluate a justifiable P/E ratio. Investors face a nearing reality check, with major potential downside risk in the next couple of weeks.
Nonetheless, with new trends in e-commerce, streaming, cloud computing, gaming, and communication, it seems safe to say that years of digitalization have appeared almost overnight, but the question remains: are expectations due for a reevaluation or can this fundamental shift continue pushing stay-at-home stocks higher? For now, nobody knows the real answer, but one thing is for sure, Q2 earnings will set the story straight.