The eagerly anticipated new tech earnings season for 2021 kicks off with Netflix, set to release its financial results after the market closes. As the industry prepares for a post-COVID-19 economy and the new post-Trump era, these earnings reports hold significant importance. The financial headlines start buzzing days before the big companies announce their performance over the past three months. Equally important are their forward-looking statements, shedding light on expectations for the next quarter.
Institutional investors closely follow these statements and data disclosures to navigate their portfolios, although many have already made their investment decisions prior to the reports. However, these reports often generate considerable interest among traders, who eagerly absorb the views, opinions, and forecasts shared by analysts and financial commentators. Ultimately, they all aim to capture your attention for their own benefit, just as we do here.
Let's consider some facts. In the third quarter of 2020, Netflix added 2.2 million global subscribers, falling significantly short of both Wall Street's estimate of 3.4 million and the company's own forecast. For comparison, Netflix had added 28.3 million new subscribers in the first three quarters of the same year. Although other streaming companies may be gaining a slice of the market, such as Amazon with its introduction of English Premiership football, Netflix still maintains an optimistic outlook. The surge in demand, driven by people staying at home, coupled with its position as one of the few platforms bringing fresh content to audiences, reinforces its potential for growth.
Notable analysts support this positive sentiment. Morgan Stanley analyst Benjamin Swinburne states, "Following the accelerated streaming adoption of 2020, Netflix this year is reinforced with unparalleled global scale and an even stronger competitive advantage that supports continued share gains in the broader $500 billion TV market." Cowen analyst John Blackledge, maintaining an outperform rating, expects high Netflix engagement due to consumers staying home amid colder weather and limited social activities. Blackledge even raised Netflix's price target to $650 from $625 on Jan. 7, further signalling optimism.
But what about trading Netflix's stock? Earnings reports often create volatility, making them attractive opportunities for many day traders. Volatility, in trading terms, refers to the frequency and extent of changes in an asset's value. While greater volatility entails higher trading risk, it also presents larger opportunities as prices experience significant movements.
In this blog, we focus on the short-term reaction to the initial data release in earnings reports. However, it's essential to remember that markets react to news and data over a longer period. The adage "the trend is your friend" holds significance. Understanding how earnings releases work is crucial; they become major events accompanied by hours, or even days, of experts offering predictions and strategies for investment or trading. We certainly emphasize their importance.
The burning question is, can you make money from earnings announcements? Like everything in the market, opinions vary, and the ultimate decision lies with individual traders based on their experience and results. In the first quarter of 2012, over 70% of S&P 500 companies beat their earnings forecasts, with an average one-day change of 0.47% to their stocks, according to the Bespoke Investment Group. While a half-percent gain may not appear significant, skilled traders recognize that they are not looking for average stocks. They seek opportunities like Apple, which experienced a $50 rise the day after reporting exceptional earnings, translating to nearly a 9% gain. Such gains are significant, especially when considering leveraged trading.
Apple is just one example. Seventeen companies saw gains of over 15% on the trading day following their earnings announcements. Notable companies like Amazon, Cirrus Logic, and Expedia witnessed substantial increases of 15.77%, 18.62%, and 26.53%, respectively. These success stories suggest that investors have favourable odds, considering that a majority of S&P stocks beat their earnings forecasts.
However, there is a fundamental challenge with short-term trading. Stocks can change direction rapidly, and holding a position after a significant movement can be risky. Prices may correct quickly after the report, erasing any gains made. This is where the trend becomes your friend.
Numerous strategies exist for trading earnings reports. One approach is to anticipate the results, although it's important to acknowledge that accurately forecasting the report or investor reactions without insider knowledge is nearly impossible. Skilled traders prioritize risk management and employ techniques such as trading short corrections or following trends once the market has digested the report and volatility has subsided.
For those interested in trading earnings announcements, the best strategy is not an all-or-nothing approach. Rather than chasing a grand score, aim to capture a portion of the gains. By doing so, even if the trade doesn't go as planned, you'll only experience a partial loss.
Let's be realistic—fundamental trading carries risks, as we have previously highlighted. However, if you can identify the right trade at the right time, the rewards can be substantial. Many traders find earnings announcements to provide an attractive risk/reward proposition. Betting on stocks expected to beat earnings expectations increases the chances of success. But even in the event of an incorrect prediction, employing various strategies can still lead to success. It's crucial not to put all your eggs in one basket.
If you're undecided or cautious, remember that pension fund managers or even governments often invest in such stocks. Alternatively, you can practice trading earnings reports through a demo account to gain experience and evaluate your performance.
In conclusion, Netflix's recent milestone of surpassing 200 million subscribers has sparked a 10% surge in its stock price, indicating positive growth prospects. Trading earnings reports can be enticing due to the volatility they generate. However, it's important to approach them with a risk management mindset and avoid the temptation of seeking huge gains at the expense of prudent decision-making. Remember, success lies in capturing a portion of the gains while effectively managing potential losses.