Last quarter Netflix stock price ran up into the earnings, as Wall St probably caught some winds the numbers would be pretty favorable. Wall St was right, and a stellar quarter for Netflix-- in terms of account growth anyway-- turned into a big climb for the stock after earnings on top of the climb in the stock before earnings. So won't this time around be the same? Momentum doesn't change THAT quickly! CAUTION, Wall Street is more clever than you think.
Sure, it's possible that NFLX posts a fantastic beyond-reproach quarter of numbers for their Q1 (March ended), and the stock jumps immediately 5% after hours tonite, and then by week (or day-end given how fast everything moves these days), it's up 10 or 12%. This isn't just possible, it seems INEVITABLE. The pattern for it already exists; it's fresh in our memory from 3 and 6 months ago. Netflix is up over 100% in a very short time! So what's the problem, just buy this dip today (NFLX down between 0.6% and 1.5% today as we write-- yeah it's volatile as a cryptocurrency!) and tomorrow (or Friday) your net worth is 10% higher. EZ-Pee-Z as they say. The problem is that 100% of people on Wall Street expect this very outcome to be very possible, after all, we've all seen either 1999 (for those older than 35) or 2007 in action. The OTHER problem is 100% of all non-Wall-Streeters expect this outcome is pretty close to 100%. So there's a LOT of people sorta banking on the same OBVIOUS outcome for the company who's monopolizing professional ("Hollywood") video programming the world-over. We have arguments about why Netflix may not be as profitable as clever Wall Street Netflix-longs may have in their spreadsheets, but FORGET about that version of reality which is roundly ignored anyway in favor of the now and the present. Let's not focus on any medium to long term fundamentals, let's focus on NOW bc Netflix reports TONITE (after the EST 16:00 market close).
Sometimes in poker, the cards values mean less than "playing the man", and this NFLX earnings could very well be one of those times. Bluffing in pro poker is pretty standard, and many many hands are decided not in how the cards values can be interpreted (or how they would fall if the rest of the cards were dealt after everyone folded to the raiser), but in the emotions and one-up-man-ship of the players and their guts. Great poker players use the fundamentals for sure, but they also use pure emotion to govern actions. A euphoric player will get in weak hands they shouldn't ("on tilt"), and a beaten-down player will default to playing only the most obviously perfect hands (known as a "rock"). Professional players understand this concept, and "play the man" not the cards. A beaten-down player might fold a table-best pair of jacks to a pro holding cards which are so bad he can't even remember what they are. The pro just looks the green player in the eyes, and reads pure emotion, pure fear, and then puts in a bet that's just big enough to thro gasoline on the fear-fire of his opponent. The opponent folds best hand. But I thought we were talking about Netflix, not a meaningless hand of poker?
image: Good ol' Wall Street can sometimes hold this hand, and yet make you fold by putting in a bet that scares you out of your pocket 6s. If NFLX trades down tomorrow, Wall Street "sold the news" on you today, and you're left holding a bag of fear. You don't have all the fundamentals, and were banking on your big bet on your pair of 6s scaring everyone, but they read your mind ahead of time and THEY were the ones doing the scaring by re-raising you and testing your conviction....
Do you have convinction, or were you just playing an obvious trend?
image: when you hold this, sometimes the whole table can tell, and they fold to your large bets, they're reading YOU not your good cards. They are cleverly "selling the news"...
Netflix's actual numbers they'll report for Q1, in stocks-parlance, is known as the "fundamentals". Those numbers will either confirm or deny the dream that Netflix will monopolize tv shows and movies forever, the world over. This can make the stock move up or down accordingly. HOWEVER, we refer not to this effect, but to the effect of the emotional game Wall Street plays. Have you ever heard of the expression...
"SELL THE NEWS"
If you never knew what sell the news means, it means you do the opposite of the anticipated headline when that headline finally comes. Like today, right? This weekend Trump fired on Syria, a move that has been projected for a long time, even by Trump himself. On Friday, fear that it might happen soon caused stocks as a whole to trade down at the end of the day, in fear of a possible strike on Syria. Well, it happened! So why aren't stocks down today?? "SELL THE NEWS". Wall Street sometimes thinks it's so clever, they play little baby games-- sorta like "chicken". See, everyone on Wall Street knows Syria is a risk, or tariffs, or impeachment-- so they anticipate these highly-likely events (ok, an impeachment isn't highly likely but someday it might be) by selling stocks ahead of it. They don't REALLY want to sell their stocks, they just want to avoid the risk that if everyone gets scared and sells stocks on a Syria warstrike, then they'll buy the stocks back when that macro-risk event is over. You're seeing that today, Monday. Everyone is buying even tho the strikes happened. It wasn't the Syrian strikes which were important (bc THOSE are bad fundamentals for stocks), it was the fact that the stock market was too weak ahead of that fear being realized. So today, Wall Street "bought the news". "Buy the News" is the same concept as "Sell the News", just the corollary.
Netflix is up 100% in the past year on anticipation of euphoric results happening now, it's up another pile of dollars since just 3 months ago when they reported a surprisingly good quarter for subscriber acquisitions. Literally everyone: ETF funds, 401K funds, pro Wall Streeters, and retail accounts have been buying Netflix ahead of this Q1 earnings, so obviously management has put out a "warm fuzzy" about earnings and everyone sorta knows the numbers will be good. But is anyone actually paying attention to the price? Does the price matter? We suspect not, we suspect the price doesn't matter at all lately. We suspect the price is irrelevant, what's relevant is that a lot of entities with cash decided they needed to be in Netflix after the last report, and they are all getting into NFLX shares before another great quarter busts it wide open and the stock becomes too expensive for anyone to "chase". Analysts on Wall St have run models which say Netflix is worth 10%, 20%, or 100% greater than the price it trades today, Monday April 16. But you know what? They aren't thinking about all the short-timers who are now in Netflix waiting for the inevitable 10% 20% or 100% increase which will happen after Netflix reports another giant set of numbers. You see, short timers don't have the patience to wait for a 100% return over 12 months. They don't even have the patience to wait any longer than the first drop in NFLX shares after the quarter is reported. Sure, if NFLX goes up 4% after hours, they might wait for tomorrow hoping for NFLX to be up 8% in the morning, and that will make them hope for up 10% by end of day. If NFLX never had a downtick, maybe they could wait the full months for NFLX stock to double. But they won't, they'll sell on the first downdraft of selling, no matter WHAT price it occurs. If NFLX reports something people with models of Netflix becoming a monopoly in 5 years don't like, those fundamentalists might re-calculate their 3-year price targets slightly lower, and sell the stock. If they sell, and NFLX god-forbid went negative after earnings tonite, or the 5% after-hours gain became a down 1% gain by 10am tomorrow (sorta like what occured in JPM stock on Friday after reporting earnings in the morning before the stock market opened-- up 1.5% in the pre-hours trading after reporting a great quarter, and then by end of Friday JPM was down almost 3%), the short-timers would sell. They don't care about anything but immediate gains, and don't understand losing money in the short term. They aren't "in it" for 3 year monopoly stories, they are in it bc the stock has been going up for the past year and they're chasing that OBVIOUS easy money.
CONCLUSION:
Long story short, it almost doesn't matter what Netflix reports tonite, it COULD trade negative tomorrow on really good numbers (cards). "SELL THE NEWS" could be the theme of the week. We're not recommending you sell your NFLX shares before the report, and we certainly don't recommend shorting. What we recommend, is that you evaluate why you might be long the stock going into earnings. Is it bc your fundamental model says NFLX is worth $1,000 per share in 3 years and you're just waiting for the numbers to support your theory? FINE, make your decision on the fundamentals tonite and tomorrow and this week-- the stock price is your b!tch. But if you own NFLX bc it's hot and obvious and you simply expect the stock to go up on a report of a great set of numbers.... well... we suggest you not be shy in selling the news now or tonite or tomorrow. You're playing hot potato in reality, while convincing yourself you're playing the fundamentals. This doesn't just go for Netflix, or FANG, or stocks in general, it goes for EVERYTHING. Buy and sell the emotional extremes, sell euphoria (like we have in NFLX right now), buy the fear (like we had on Friday ahead of the Syrian attacks). In short, don't just play your cards, play the cards AND the other playas. Wall Street is more clever than obvious, so you REALLY need to have high conviction and a penchant for defying your own fears and euphorias.
(someday we'll bore you with all the things which could go wrong for Netflix's world-monopoly theme-- but mostly we'd just point out a little stock that once had a monopoly on free internet radio called Pandora-- heck, they STILL probably have the monopoly, but how profitable is it after "Hollywood" came a knockin for their "fair share" of the mula?)
Good theme, but perhaps you should have chosen Goldman Sachs and JPMorgan as your foil!?
Update: NFLX is trading $308 today, it's been trading down every day since the day after earnings. So while earnings were pristine, "sell the news" indeed in full effect.
Please also note: NFLX traded $304 to $316 the day before earnings, so if anything, it's down a little from the average of that day.
We rest our case, on "sell the news", but obviously in THIS case, the luckiest strategy would have been to sell the pop AFTER earnings rather than before. But that was NOT the case with the big banks, nor Google's earnings last night.