Article / 18 October 2016 at 8:16 GMT

From the Floor: Netflix basks, but spending 'a worry' — #SaxoStrats

Your Next Trade
  • Netflix soars after stellar Q3 rebound and 'we must acknowledge this' — Garnry
  • Cash spend to revenue ratio 'still a worry' — Garnry
  • Goldman Sachs can ride bandwagon, but pharma faces brick wall — Garnry
  • Dollar on the back foot as Fed raises the accommodative signals — Moltke-Leth
  • NZD soars on the back of better-than-expected Q3 CPI data
  • GBPUSD vols continue elevated at 12.75% — Norup
  • Overnight EURUSD options at 16.5% ahead of ECB meeting — Norup
By  Martin O'Rourke


A blockbusting third-quarter performance from Netflix overnight confounded many of its critics and put the internet TV giant seemingly back on course after a difficult first half of the year.

Net income year-on-year rose to $2.29 billion but the key figure was a surge in its subscription numbers which grew by 370,000 in the US and by 3.2 million in its international business, outstripping expectations by a wide margin and helping the share accelerate some 20% on the print.

"Netflix beat expectations by a very wide margin and did significantly better than expected," says Peter Garnry, head of equities strategy at Saxo Bank. "We have to acknowledge this as a very good result and while it is difficult to gauge what is going on, it is possible that it will challenge its high from late last year when it was up at about $133."

Netflix was up at $119.50 in after-hours trading.

Great result notwithstanding, Garnry, speaking on Saxo Bank's daily global morning call, still has serious doubts about the long-term business model and where this will all lead to.

"The weakness for Netflix can be seen in the cash flow which tells you much of what you need to know about the model," says Garnry. "Cash spend on acquiring new subscribers is up by 100% and revenues are up by 30%, so the difference between the cash they can rake in and the amount they have to spend on generating new customers or satisfying current customers is a key ratio and a bit of a worry for me."

Netflix plans to spend $6bn on content in 2017 as it battles with the likes of Amazon and HBO for market share through its original content strategy that has seen the likes of Stranger Things, House of Cards and Making a Murderer come to our TV screens.

"I'm still leaning towards short and negative on Netflix for the bearish reasons I have also outlined various times," says the equities head.

Who's up?

Earnings season is well under way and Goldman Sachs is one that Garnry likes and which could jump on the JP Morgan Chase bandwagon from last week.

"We do expect Goldman Sachs to perform quite well and I would be surprised if Goldman hasn't done a good job in Q3," says Garnry. "Goldman shares may be down slightly since JP Morgan printed that very good result on Friday but you shouldn't read too much into that and it could lead to an even bigger surprise."

Goldman Sachs could leap on a financials' bandwagon started by JP Morgan last week

Johnson and Johnson and Philip Morris also go to the wire today with the former likely to produce a solid result and the classic "defensive stock" Philip Morris also expecting to slip by without causing too many tremors through the market.

Garnry is far more concerned about the US healthcare segment especially as the race for The White House appears to be moving towards a decisive conclusion.

"We're moving closer to the election day in the US and it is looking increasingly like a Hillary Clinton win," says the equities chief. "A Clinton administration would increase the likelihood for a very harsh stance against the healthcare sector especially if the senate also comes under democratic control."

"I don't buy into this notion that healthcare is at the lowest multiples in many years," says Garnry. "I don't think it's a particularly inexpensive sector and if the current trajectory continues as it is, then we could see more weakness into Q4 and Q1 2017."

"Healthcare could be a falling knife as we move through the presidential campaign and beyond."

It's a thumbs up, however, for housebuilders which could ride out the Federal Reserve's much-mooted rate hike. 

"The Fed talk is taking its toll but it might be worth a trade when we get past the next rate hike and people realise it's not putting a dent on growth," says Garnry.

Healthcare could have further to drop but there might be a surprise upswing for homebuilders

Dollar down

The dollar was retreating overnight as yet more accommodative noises emerged from the Fed with Stanley Fischer the latest to wax lyrical on the potential structural problems facing the US economy.

"USD has been on the back foot with the Fed looking like it will be accommodative for a lot longer," says Christopher Moltke-Leth, from Saxo Bank's Singapore hub. "Fischer pointed towards slowing economic growth, changing demographics, lower corporate investment and slower overseas growth."

"In time, this will hit labour force participation."

EURUSD returned above the 1.10 handle overnight and was at 1.1020 at 0655 GMT.

Overnight EURUSD volatility was up at abut the 16.5% mark as traders start to hedge their bets ahead of the European Central Bank meeting on Thursday, but that is still some way below levels for the last few meetings, reports Jeppe Norup from the FX Options desk.

"The market is very biased towards euro Puts so we could see a move on the back of the ECB meeting if there is a downside surprise," he says.

One-month GBPUSD at-the-money vols, meanwhile, continue "very elevated" at the 12.75% mark. "We still see continued big moves in sterling as markets are very illiquid," says Norup. "Realised volatility is maintaining vols at a relatively high level."

Realised vols continue higher than implied vols on 1-month GBPUSD
 Source: Bloomberg

And finally....

More often than not when we've cast our eye in the direction of NZD, it's not been good news but better-than-expected Q3 CPI data propelled NZDUSD up some 70 pips.

"This adds to evidence of further green shoots in global inflation data and reduces the odds of another RBNZ rate cut in November or December," says Moltke-Leth.

 It was a big upside surprise for Netflix overnight. Photo: iStock

Martin O'Rourke is managing editor at Saxo Bank 

Editor’s note: From the Floor takes advantage of's unique real-time access to Saxo Bank’s various trading desks around the globe to put our community in touch with the developments that matter to their portfolios.


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