In my last post, I referred to the quarterly earnings season that we are now in the thick of as a circus. And Boy has it lived up to that name. The overreaction of investors to quarterly results never ceases to astound.
The main event this season (so far at least) has to be the Google earnings report, but Netflix came in a close second. Google investors had one of the greatest overreactions to a quarterly earnings report in the history of quarterly earnings reports. The company earned about $170 million more in the second quarter than analysts were expecting which is equal to about 0.85% of the company’s annual net income.
Nothing to get excited about, right?
Don’t tell that to the speculators and traders who bid up Google shares by 20% on the news, tacking $65 billion onto the company’s market value. Google’s $65 billion one day increase in market value is greater than the total market value of all but the 71 largest publicly traded American companies.
Sound like an appropriate reaction to you?
Sounds more like the reaction one would expect in a bubble environment, as did the reaction to Netflix’s earnings report. Netflix shares jumped over 18% following the company’s second quarter results. Netflix matched revenue estimates and it actually missed earnings estimates so the share price jump was even more disturbing.
Why did investors bid up shares of Netflix on an earnings miss?
Apparently revenues and earnings aren’t the focus of Netflix investors today. This should sound familiar to investors who were around during the dotcom bubble when eyeballs, pageviews, and visits were how investors valued stocks. Netflix investors are using a similar non-financial metric to value the company today– subscribers. There may be a closer link between the number of Netflix subscribers and future revenues than between pageviews and revenues, but you wouldn’t know it from the company’s results. Netflix added more subscribers than expected in the latest quarter, but earnings fell short of estimates and revenues only matched expectations. Netflix shares now trade at 317X earnings. At the current level of profitability Netflix is going to need a whole lot more subscribers to justify its current price.
The reaction of Netflix and Google to their quarterly earnings reports signals that we continue to be in one of the most speculative markets in years. For serious, conservative, long-term investors patience remains the mandate.
Jeremy Jones, CFA
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