More people sitting around watching Netflix may help rekindle some animal spirits in the stock market.
The company on Tuesday reported that far more people signed up for its video-streaming service in the third quarter than expected. Netflix’s shares soared as much as 13 percent in the trading that takes place after regular market hours.
After the stock market suffered a steep swoon this month, results like that should help stocks recover. Netflix’s report was the first from one of the big technology companies that helped drive the S&P 500 to a record last month.
Investors have charted the performance of these tech stocks by bunching them into a group they call FAANG, which includes Facebook, Apple, Amazon, Netflix and Google. Their contribution to overall market has been significant. In the 12 months through Monday, the S&P 500 had risen 7.7 percent, but without the five technology stocks its performance was only 5.2 percent, according to an analysts by Credit Suisse.
Netflix is the priciest of the five prominent technology companies. This makes it a good barometer for the amount of bullishness in the stock market. If the stock keeps rising over the coming weeks, it would underscore that investors still have a strong appetite for riskier companies, an attitude that might spill over into other technology firms.
As Netflix’s third-quarter results showed, it’s doing well in some respects. It added 7 million subscribers in the period, a larger amount than it added in the third quarter of last year. But the company is also consuming large sums of cash to finance its growth and borrowing more to cover its shortfall. Netflix also faces serious competitive threats, like Disney’s plan to set up its own subscription video service.
Yet an important stock market yardstick — the price-earnings ratio — suggests investors have an almost unquestioning faith in Netflix’s ability to notch fast-growing earnings. This ratio compares its stock price with its earnings. Take a company with a stock trading at $100. If investors expect it to make $10 per share (its net income divided by the number of shares it has issued), it would have a price-earnings ratio of 10.
The ratio for the companies in the S&P 500 is currently 17.8 times the earnings they are expected to make this year, according to data from S&P. Netflix’s multiple, at 145 times, is far higher. It’s so much larger because investors expect Netflix’s earnings to grow more quickly than those of other companies.
Of course, it’s still early in the earnings reporting season — and jarring disappointments may occur. Facebook is facing mounting regulatory scrutiny and is spending large sums on making its network more secure. Apple is trying to increase its revenue in part by selling higher priced phones that may turn off some consumers.
Outside of the technology space, investors are concerned that President Donald Trump’s trade wars may hurt the earnings of large manufacturing companies.
But after stocks had a wobbly start to October, strong earnings have already helped reassure investors. Before Netflix reported its performance, two well-known Wall Street firms, Morgan Stanley and Goldman Sachs, reported earnings that provided more evidence that the banking sector is in a good position to finance economic growth.
After those reports and a few others, the S&P 500 jumped 2.15 percent, its biggest single day gain since March.
