Article / 19 April 2016 at 7:53 GMT

Netflix, IBM stumble on Q1 earnings

Head of Equity Strategy / Saxo Bank
  • Netflix, IBM plunge in after-hours session post earnings
  • IBM struggling with cloud computing segment
  • Netflix spending out of tune with growth

By Peter Garnry

The US earnings season continues apace with Netflix and IBM among the latest companies to report. Unfortunately, the news was negative in both cases. Here’s why:

IBM struggling with the cloud

IBM’s earnings showed the 16th straight quarter of negative revenue growth (year-over-year), and the firm’s Cognitive Solutions division – the division containing IBM's “Watson” artificial intelligence programme – saw a 2% fall in its y/y revenues.

IBM shares remain expensive, trading at an 11.3x 12-month earnings-per-share multiple – a definite value trap.

This business, it would appear, is being disrupted by cloud computing and it is difficult to ascertain whether IBM will prove a future leader in this segment. 

The Saxo view on IBM is structurally negative against other IT firms; the company’s shares fell 5% in the after-hours session post the earnings release.


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Source: Saxo Bank 

Netflix routed by earnings 

Netflix’s earnings were also hugely disappointing as the report showed international subscriber growth at 2 million versus 3.5m expected. This comes down to high prices, a poor product mix, and a slow rollout of new content.

Revenue growth came in at 24.5% y/y compared to a 41.3% rise in cash paid for content-streaming assets – this, it should be noted, was our main argument when we shorted Netflix back in January.

Netflix shares fell by 10% in the after-hours session and the Saxo view is negative.

One potential way to play this circumstance is via the Dec 16 at-the-money put at $13 (assuming the underlying opens at $100).

Source: Saxo Bank 

— Edited by Michael McKenna

Peter Garnry is head of equity strategy at Saxo Bank

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How close do you think they are to open the Chinese market? And isen't also just temporaly when they open in Germany the stock also dropped the following quater but later caught up when they were up and rolling.


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