Tech stocks rally on Netflix subscriber growth, layoffs – will the rally last?

A jump in Netflix’s subscriber growth and a wave of layoffs at major tech companies set the stage for a tech frenzy as the fourth-quarter reporting season unfolds over the next couple of weeks.

Last Thursday, Netflix surprised Wall Street with a pullback in its subscription numbers from a loss of 200,000 in early 2022 to 7.6 million additions in the fourth quarter, though it missed earnings expectations.

“Content is key in the current streaming settlement, and Netflix delivered a strong quarter of movies and series that retained customers and attracted new ones,” Josh Gilbert, market analyst at eToro told the International Business Times. “Investors will hope that the streaming giant can continue to deliver a steady stream of new releases through 2023 rather than one-hit wonders every now and then.”

That’s why they ignored the earnings miss and rushed to buy Netflix shares, which rose in Friday’s trading.

Meanwhile, news that Alphabet plans to cut 12,000 jobs also helped shares of the search engine giant rally on Friday.

Positive sentiment from Netflix’s return to growth and Alphabet’s job cuts spilled over to other major tech peaks, helping the tech-heavy Nasdaq end Friday’s session up 2.66% for the day and 0.50% for the week.

The rally could continue next week for a couple of reasons. First, the setback in Netflix’s subscription numbers confirms that the tech giants still have room to grow.

Second, Google’s job cuts, which follow similar moves by Microsoft and Meta, confirm that the tech giants are serious about maintaining profit margins.

Thus, traders and investors are prepared to forgive these companies for a decline in earnings due to the challenging macroeconomic environment.

Still, Gilbert is skeptical of investors’ enthusiasm for Netflix subscription growth, as the company has a lot of work to do.

“2022 was the slowest year of subscriber growth since 2011 despite the strong finish to the year. In addition, both earnings and revenue missed Street expectations. Revenue came in at $7.85 billion versus expectations of $7.86 billion, and earnings were low at USD 0.12c vs USD 0.42c expected,” he said.

Meanwhile, cutbacks also have their limitations. They can help the tech giants cut costs and deal with macroeconomic challenges in the short term, but they cannot protect these companies from long-term microeconomic challenges.

Matthew Tuttle, CEO and CIO of Tuttle Capital Management, is also skeptical of the recent rally on Wall Street, for different reasons.

“The market is fighting a battle between a Fed that is trying to tell people that they are going to keep interest rates higher for longer and that inflation is a problem and traders who don’t believe them,” he told IBT. “Until the argument is resolved, the market is not going to go anywhere fast.”

Moreover, he is concerned about the marketing technique.

“We are now slightly above the 200-day moving average on the S&P 500,” he explained. “Every time we come up here we end up selling out, and this time is likely to be no different. So for now, we expect to be in a trading range between the 50-day moving average and the 200-day, with the real action being rotations back and forth between sectors.”

The Netflix logo is seen on a TV remote control, in this illustration
Reuters

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