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After Netflix's Mixed Q1 Earnings, Should You Sell Your FANG Stocks?
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After a mixed first-quarter earnings release Monday, shares of Netflix fell more than 1.85% in early morning trading on Tuesday. Despite solid revenue growth, investors were unimpressed with several other key figures from the report, which has cast a cloud of uncertainty over the tech sector—especially the notorious “FANG” stocks—and left many wondering what exactly the market wants this earnings season.
FANG, an acronym coined by CNBC’s Jim Cramer several years ago, refers to Facebook , Amazon (AMZN - Free Report) , Netflix (NFLX - Free Report) , and Google (GOOGL - Free Report) . Each of these companies are primarily focused on tech or internet services, and they all own a solid share of the market in their respective industries.
These stocks have traditionally been appealing because of their promises to deliver aggressive growth in their own key areas, but Netflix’s latest earnings report underscores the recent shift in focus throughout the FANG group, calling each individual stock into question this earnings season.
What Netflix’s Q1 Earnings Shows Us
For the first quarter, Netflix reported earnings of 40 cents per share, which beat the Zacks Consensus Estimate of 38 cents per share and marked year-over-year growth of over 560%. Netflix’s quarterly revenue of $2.637 billion narrowly missed our consensus estimate of $2.641 billion, but it also displayed aggressive growth, gaining about 35% from the year-ago quarter (also read: Netflix Posts Earnings Beat, Stock Dips on Weak Guidance).
The investors that are selling Netflix in the wake of its report seem to be focused on the company’s slightly disappointing subscriber growth figures. The streaming service reached 98.75 million total members in the quarter, with 94.36 of those being paid, non-trial memberships. This fell just short of the 99 million members that the company guided for in its previous report.
For years, Netflix has traded on this subscriber growth figure, but with its international expansion completed over a year ago, a focus on membership adds seems a bit outdated. Netflix thinks this too.
“For the last several years we’ve had flat operating margins due to established markets funding international expansion with every spare dollar we had… the major indicators of our progress were member and revenue growth and US contribution margins,” the company said in its shareholder letter. “Starting this year, we can be primarily measured by revenue growth and (global) operating margins as our primary metrics.”
Netflix’s key metric is no longer what it used to be, and this idea becomes a pattern when we look at the other FANG stocks.
Take Facebook, for example. In February, shares of Facebook dipped slightly after its fourth-quarter report, despite the fact that the company beat our consensus earnings and revenue estimates. Why? Because investors wanted more of the aggressive-growth Facebook that they had grown accustom to (also read: Why Facebook Stock Slumped Despite Solid Earnings Report).
In reality, Facebook warned investors that this year would be one of heavy investments into its future and significantly slowed year-over-year growth. While this could mean a short-term hit to earnings, Facebook longs should be rejoicing that the company has realized it needs to work on the next big growth opportunity right now. That may take years to pay off, but Mark Zuckerberg and company have a history of being right.
For Amazon, the story is similar. We once focused on the growth of its e-commerce business and questioned its ability to dominate traditional retailers. Now Amazon has all but killed old-school retail, and investors are more concerned with the growth of Amazon Web Services and Amazon’s media investments.
Google has a similar story. Heck, Google isn’t even Google anymore. Alphabet Inc., the new-ish parent company of Google, has its hands in just about every emerging tech market. Why? Because Google’s traditional advertising business is slowly fading. The company is focusing on new growth opportunities.
Bottom Line
As we look ahead to the upcoming earnings announcements from Facebook, Amazon, and Alphabet, don’t make the same mistake that some Netflix investors have today. These aren’t your daddy’s FANG stocks, and that means you shouldn’t be focused be on all the old key metrics.
With that said, remember to look at these stocks individually, and study the latest trends in earnings estimates and estimate revisions before making a play on any of them.
Sell These Stocks. Now.
Just released: today's 220 Zacks Rank #5 Strong Sells demand urgent attention. If any are lurking in your portfolio or Watch List, they should be removed immediately. These are sinister companies because many appear to be sound investments. However, from 1988 through 2016, stocks from our Strong Sell list have actually performed 6X worse than the S&P 500. See today's Zacks "Strong Sells" absolutely free >>
Sell These Stocks. Now. Just released: today's 220 Zacks Rank #5 Strong Sells demand urgent attention. If any are lurking in your portfolio or Watch List, they should be removed immediately. These are sinister companies because many appear to be sound investments. However, from 1988 through 2016, stocks from our Strong Sell list have actually performed 6X worse than the S&P 500. See today's Zacks "Strong Sells" absolutely free >>
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After Netflix's Mixed Q1 Earnings, Should You Sell Your FANG Stocks?
After a mixed first-quarter earnings release Monday, shares of Netflix fell more than 1.85% in early morning trading on Tuesday. Despite solid revenue growth, investors were unimpressed with several other key figures from the report, which has cast a cloud of uncertainty over the tech sector—especially the notorious “FANG” stocks—and left many wondering what exactly the market wants this earnings season.
FANG, an acronym coined by CNBC’s Jim Cramer several years ago, refers to Facebook , Amazon (AMZN - Free Report) , Netflix (NFLX - Free Report) , and Google (GOOGL - Free Report) . Each of these companies are primarily focused on tech or internet services, and they all own a solid share of the market in their respective industries.
These stocks have traditionally been appealing because of their promises to deliver aggressive growth in their own key areas, but Netflix’s latest earnings report underscores the recent shift in focus throughout the FANG group, calling each individual stock into question this earnings season.
What Netflix’s Q1 Earnings Shows Us
For the first quarter, Netflix reported earnings of 40 cents per share, which beat the Zacks Consensus Estimate of 38 cents per share and marked year-over-year growth of over 560%. Netflix’s quarterly revenue of $2.637 billion narrowly missed our consensus estimate of $2.641 billion, but it also displayed aggressive growth, gaining about 35% from the year-ago quarter (also read: Netflix Posts Earnings Beat, Stock Dips on Weak Guidance).
The investors that are selling Netflix in the wake of its report seem to be focused on the company’s slightly disappointing subscriber growth figures. The streaming service reached 98.75 million total members in the quarter, with 94.36 of those being paid, non-trial memberships. This fell just short of the 99 million members that the company guided for in its previous report.
For years, Netflix has traded on this subscriber growth figure, but with its international expansion completed over a year ago, a focus on membership adds seems a bit outdated. Netflix thinks this too.
“For the last several years we’ve had flat operating margins due to established markets funding international expansion with every spare dollar we had… the major indicators of our progress were member and revenue growth and US contribution margins,” the company said in its shareholder letter. “Starting this year, we can be primarily measured by revenue growth and (global) operating margins as our primary metrics.”
Netflix’s key metric is no longer what it used to be, and this idea becomes a pattern when we look at the other FANG stocks.
Take Facebook, for example. In February, shares of Facebook dipped slightly after its fourth-quarter report, despite the fact that the company beat our consensus earnings and revenue estimates. Why? Because investors wanted more of the aggressive-growth Facebook that they had grown accustom to (also read: Why Facebook Stock Slumped Despite Solid Earnings Report).
In reality, Facebook warned investors that this year would be one of heavy investments into its future and significantly slowed year-over-year growth. While this could mean a short-term hit to earnings, Facebook longs should be rejoicing that the company has realized it needs to work on the next big growth opportunity right now. That may take years to pay off, but Mark Zuckerberg and company have a history of being right.
For Amazon, the story is similar. We once focused on the growth of its e-commerce business and questioned its ability to dominate traditional retailers. Now Amazon has all but killed old-school retail, and investors are more concerned with the growth of Amazon Web Services and Amazon’s media investments.
Google has a similar story. Heck, Google isn’t even Google anymore. Alphabet Inc., the new-ish parent company of Google, has its hands in just about every emerging tech market. Why? Because Google’s traditional advertising business is slowly fading. The company is focusing on new growth opportunities.
Bottom Line
As we look ahead to the upcoming earnings announcements from Facebook, Amazon, and Alphabet, don’t make the same mistake that some Netflix investors have today. These aren’t your daddy’s FANG stocks, and that means you shouldn’t be focused be on all the old key metrics.
With that said, remember to look at these stocks individually, and study the latest trends in earnings estimates and estimate revisions before making a play on any of them.