Netflix Earnings “Miss” Signals Possible Tech Correction

A “near miss.”

That’s the best way to describe the market this morning after it narrowly avoided a bearish breakout. Stocks opened higher and added to their gains around noon, staving off a deeper decline below the prior day’s low.

Reopening-sensitive and cyclical shares did most of the heavy lifting. Airlines and cruise lines surged.

The only major stock left out of the bullish rebound was Netflix (NASDAQ: NFLX), which suffered a huge earnings “miss” when it reported last evening. The company saw barely any subscriber growth in Q1. Even worse, it expects growth to remain sluggish in Q2.

“We believe paid membership growth slowed due to the big Covid-19 pull forward in 2020 and a lighter content slate in the first half of this year, due to Covid-19 production delays,” Netflix said in its shareholder letter.

Does a similar fate await other Big Tech names? Wall Street has long predicted a rotation out of growth (i.e., tech) and into value. If the rest of FAANG endured slow Q1 growth, it may be enough to sink the tech sector altogether.

And, ultimately, the general market.

It’s not out of the question to think that other companies enjoyed a Covid-19 “pull forward” like Netflix did, either. And now that the pulling is over, tech profits could turn out to be far worse than estimated.

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Netflix further supported this theory when it published a report on how competitors impacted business.

“We don’t believe competitive intensity materially changed in the quarter or was a material factor in the variance as the over-forecast was across all of our regions,” the company said in its report.

“As we’ve noted previously, the production delays from Covid-19 in 2020 will lead to a 2021 slate that is more heavily second-half weighted with a large number of returning franchises.”

In other words, expect Q2 to also be a bust. Hopefully, for Netflix bulls, the streaming giant can right the ship in Q3 and Q4 like the company says it will.

Value stocks, on the other hand, are smashing earnings out of the park. Some analysts think they’re underselling on guidance, too, meaning there might be even more upside to come.

“It appears the economy is now well on its way to recovery. Still, earnings guidance early in the current reporting season appears to lean more conservative than our economic projections suggest,” explained Scott Wren, Wells Fargo’s senior global market strategist.

Still, others remain skeptical about how much higher the market can truly go.

“This has been a very good earnings season as 90% of the S&P 500 companies delivered robust results, but the problem for stocks is that most of the good news has already been priced in,” said Onada senior market analyst Edward Moya in a note.

Either way you slice it, the market is in a highly precarious spot. A correction will eventually happen. It has to; stocks can’t simply go up forever without some sort of sell-off. It’s a necessary part of any protracted bull run.

The real danger is how far stocks will fall when bears finally come roaring back. The higher stocks go now, the further they’ll drop before finding support. And if the major indexes drop too quickly, the selling could snowball into something more sinister.

Cutting into value and growth stocks alike, regardless of earnings or guidance.

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