A jump in Netflix‘s subscriber growth and a wave of layoffs by large tech companies set the stage for a tech rally as the fourth-quarter reporting season unfolds in the next couple of weeks.
Last Thursday, Netflix surprised Wall Street with a bounce back of its subscription numbers from the 200,000 loss early in 2022 to 7.6 million addition in the fourth quarter, though it missed earnings expectations.
“Content is key in the current streaming showdown, and Netflix delivered a strong quarter of movies and shows that retained customers and attracted new ones,” Josh Gilbert, market analyst at eToro told International Business Times. “Investors will hope the streaming giant can continue delivering a steady stream of new releases throughout 2023 instead of one-hit wonders now and then.”
That’s why they ignored the earnings miss and rushed to buy Netflix’s shares, which rallied in Friday’s trading session.
Meanwhile, news that Alphabet is planning to cut 12,000 jobs also helped the shares of the search engine giant rally on Friday.
The positive sentiment from Netflix’s return to growth and Alphabet’s job cuts spread to other large tech caps helping the tech-heavy Nasdaq end Friday’s session with a 2.66% gain for the day and 0.50% for the week.
The rally could continue next week for a couple of reasons. First, the bounce back in Netflix’s subscription numbers confirms that tech giants still have room to grow.
Second, Google‘s job cuts, which follow similar moves by Microsoft and Meta, confirm that the tech giants are serious about maintaining profit margins.
Thus, traders and investors are prepared to forgive these companies for an earnings slow-down due to the challenging macroeconomic environment.
Still, Gilbert is skeptical about investors’ excitement for Netflix subscription growth, as the company has much work to do.
“2022 was its slowest year of subscriber growth since 2011 despite the strong end to the year. In addition, earnings and revenue both missed the street’s expectations. Revenue came in at USD$7.85 billion against expectations of USD$7.86 billion, and earnings were light at USD$0.12c vs. the USD$0.42c expected,” he said.
Meanwhile, job cuts have their limitations, too. They can help tech giants cut costs and deal with macroeconomic challenges in the short run, but they cannot protect these companies from long-term microeconomic challenges.
Matthew Tuttle, CEO and CIO of Tuttle Capital Management, is also skeptical about the recent rally on Wall Street, for different reasons.
“The market is fighting a battle between a Fed that is trying to tell people they are going to keep rates higher for longer and that inflation is a problem and traders who don’t believe them,” he told IBT. “Until the argument gets resolved, the market isn’t going to go anywhere fast.”
Moreover, he’s concerned about the market technicals.
“We are now slightly above the 200-day moving average on the S&P 500,” he explained. “Every time we get up here we end up selling off, and this time probably won’t be any different. So for now, we expect to be in a trading range between the 50-day moving average and the 200-day, with the real action being rotations back and forth between sectors.”