(ticker: NFLX) shares can keep climbing, there’s hope for tech in general, argues MKM Partners.
Where we were: Tech was hit hard in 2018, although among the FAANG stocks, Netflix held up best over the past 12 months.
Where we’re headed: Netflix is leading the FAANG pack again since the start of the year, up 31%, and that’s good news for other risk-on assets.
The tech trade worked well—until it didn’t. In the second half of 2018, the FAANG stocks—
(AMZN), Netflix, and Google parent
(GOOGL)—lost their edge after a series of high-profile problems, along with a growing aversion to risk: As worries about global growth and trade dominated investors’ minds, tech lost out to sectors, like health care, that are perceived as safer.
Given this backdrop, it’s somewhat surprising that of all the FAANGs, Netflix is the stock that fared the best, both in 2018 and since the start of 2019. Certainly, the company didn’t act very, very badly and then allegedly lie about it like Facebook, but just going by the numbers Netflix seems like the most unlikely candidate, given that its valuation is the highest and it has the most levered balance sheet. Perhaps that speaks to the theory that the bull market was just on pause, rather than more permanent hiatus. And the fact that it’s thrived since gives MKM Partners’ Rob Sanderson hope for the group as a whole.
The company’s characteristics means that Netflix stock is “the embodiment of a risk asset, certainly more than the other mega-caps,” writes Sanderson. So, in many cases, the tech seems to follow its lead.
That was bad news late last year, when Netflix fizzled following its third-quarter earnings report. Yet since the market bottomed on Christmas Eve, Netflix has been on a tear, its trajectory bolstered even further by reports Wednesday of planned price increases. The upshot is that Netflix shares are up more than 50% in three weeks, Sanderson writes, and he is “optimistic” that the “resurgence…will continue to spill into a more broad-based recovery for the group, as it has been so far.” Indeed, Amazon, Facebook, and Google have also notched double-digit stock increases over the same time period (albeit smaller than Netflix).
The theory could be tested quite soon: Netflix is slated to report earnings after the close of trading Wednesday. If the company can deliver a solid quarter and boost the stock further, it could be “important for risk appetite in general, which has started the year on an upswing,” Sanderson writes.
Netflix is up less than 0.1% to $351.50 in recent trading.
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