Q3 earnings are off to a good start; this week is about Netflix and Tesla

Q3 earnings are off to a good start; this week is about Netflix and Tesla

Equities 5 minutes to read
Peter Garnry

Chief Investment Strategist

Summary:  S&P 500 earnings in Q3 have so far been better than expected with the technology sector showing almost 10% earnings growth from a year ago. Our view remains positive on Q3 earnings, but there will likely be hiccups here and there in some of the most hyped stocks. Both Netflix and Tesla reporting earnings this week are part of the 'US technology trade' this year and expectations are extremely for those two companies to deliver. In today's equity update we take a look at both companies.


We have said repeatedly that the Q3 earnings season is very important because the rebound in equities has discounted a sharp rebound in corporate earnings which are expected to rise 35% q/q. If earnings are not showing a strong rebound, it will be difficult to justify the current levels in equities unless investors get a positive surprise on the fiscal impulse.

Based on the 51 earnings releases in the S&P 500* so far for Q3 the revenue and earnings surprise has been positive with especially earnings surprising a lot to the upside. Growth in revenue and earnings is still negative y/y but only -2.7% for revenue and -19% for earnings with the information technology showing +10% y/y growth in earnings in Q3 highlighting the risk appetite for technology stocks by investors. Earnings estimate still suggest that US companies will be back to record earnings by Q3 2021. One potential drag on this rebound trajectory could come from a Biden administration if his tax policies are carried out to the extend communicated in his campaign material. Biden’s proposals to increase the corporate tax rate and the GILTI (global intangibles low-taxed income) tax rate could create a 10%-point headwind on S&P 500 earnings and hit the IT, health care and communication services sectors the hardest.

Can Netflix maintain its positive cash flows?

The first real test of the wider technology segment in US equity markets will be tomorrow when Netflix reports Q3 earnings after the market close. Netflix shares have been riding the Covid-19 bonanza in technology stocks up 64% this year elevating expectations for strong Q3 numbers. But the Q2 numbers did not show a significantly positive impact on revenue growth but instead higher usage from existing subscribers. This disappointed the market with the shares dropping 6.5%, the biggest drop related to its earnings releases since Q2 2019.

Production delays played its positive part on operating cash flows accelerating to $1.04bn in Q2 creating the largest free cash flow in Netflix’s history of $900mn up from a negative free cash flow of $1.6bn in Q4 2019. Analysts expect free cash flow to be $180mn this year and then go back into negative in FY21 raising the question whether Netflix will ever reach the profitability level needed to support the valuation which is almost 5x the global equity market on EV/EBITDA. Given the slowdown in content production we believe there is a real danger of Netflix disappointing the market tomorrow.

Source: Saxo Group

Will Tesla deliver on the hype?

Tesla reports Q3 earnings on Wednesday after the close with analysts expecting revenue to jump 31% y/y to $8.3bn. With its shares up 426% this year there is a lot at stake for Tesla as the hype has gone hyperbolic underpinning the market’s bet that Tesla will dominate the future car industry as electric vehicles penetrate the overall car market even further. Tesla has recently announced price cuts across its models and pushed global deliveries to 139,300 in Q3 which has to accelerate to 181,000 in Q4 to meet its 500,000 target for this year. The key catalyst for Tesla in the short-term is the growing EV market in China which is supplied through its Gigafactory in Shanghai and the outlook for China sales is key to how the stock price will react. The historical absolute change around earnings releases has been around 9.5% and we expect a lot of volatility around Q3 earnings simply because of the enormous momentum in the stock price this year.

Source: Saxo Group

The table below shows the other important earnings being released this week.

Source: Bloomberg and Saxo Group

* Companies that have two months of a fiscal quarter overlapping with the calendar quarter will be designated to the Q3 earnings season. A company with earnings ending on August 31 (reported sometime during September) will be added to the Q3 earnings season numbers.

Quarterly Outlook

01 /

  • Macro Outlook: The US rate cut cycle has begun

    Quarterly Outlook

    Macro Outlook: The US rate cut cycle has begun

    Peter Garnry

    Chief Investment Strategist

    The Fed started the US rate cut cycle in Q3 and in this macro outlook we will explore how the rate c...
  • Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Quarterly Outlook

    Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Althea Spinozzi

    Head of Fixed Income Strategy

  • Equity Outlook: Will lower rates lift all boats in equities?

    Quarterly Outlook

    Equity Outlook: Will lower rates lift all boats in equities?

    Peter Garnry

    Chief Investment Strategist

    After a period of historically high equity index concentration driven by the 'Magnificent Seven' sto...
  • FX Outlook: USD in limbo amid political and policy jitters

    Quarterly Outlook

    FX Outlook: USD in limbo amid political and policy jitters

    Charu Chanana

    Chief Investment Strategist

    As we enter the final quarter of 2024, currency markets are set for heightened turbulence due to US ...
  • Commodity Outlook: Gold and silver continue to shine bright

    Quarterly Outlook

    Commodity Outlook: Gold and silver continue to shine bright

    Ole Hansen

    Head of Commodity Strategy

  • FX: Risk-on currencies to surge against havens

    Quarterly Outlook

    FX: Risk-on currencies to surge against havens

    Charu Chanana

    Chief Investment Strategist

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperfo...
  • Equities: Are we blowing bubbles again

    Quarterly Outlook

    Equities: Are we blowing bubbles again

    Peter Garnry

    Chief Investment Strategist

    Explore key trends and opportunities in European equities and electrification theme as market dynami...
  • Macro: Sandcastle economics

    Quarterly Outlook

    Macro: Sandcastle economics

    Peter Garnry

    Chief Investment Strategist

    Explore the "two-lane economy," European equities, energy commodities, and the impact of US fiscal p...
  • Bonds: What to do until inflation stabilises

    Quarterly Outlook

    Bonds: What to do until inflation stabilises

    Althea Spinozzi

    Head of Fixed Income Strategy

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain ...
  • Commodities: Energy and grains in focus as metals pause

    Quarterly Outlook

    Commodities: Energy and grains in focus as metals pause

    Ole Hansen

    Head of Commodity Strategy

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities i...
Disclaimer

The Saxo Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-hk/legal/disclaimer/saxo-disclaimer)

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo or its affiliates.

Saxo Capital Markets HK Limited
19th Floor
Shanghai Commercial Bank Tower
12 Queen’s Road Central
Hong Kong

Contact Saxo

Select region

Hong Kong S.A.R
Hong Kong S.A.R

Saxo Capital Markets HK Limited (“Saxo”) is a company authorised and regulated by the Securities and Futures Commission of Hong Kong. Saxo holds a Type 1 Regulated Activity (Dealing in Securities); Type 2 Regulated Activity (Dealing in Futures Contract); Type 3 Regulated Activity (Leveraged Foreign Exchange Trading); Type 4 Regulated Activity (Advising on Securities) and Type 9 Regulated Activity (Asset Management) licenses (CE No. AVD061). Registered address: 19th Floor, Shanghai Commercial Bank Tower, 12 Queen’s Road Central, Hong Kong.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products may result in your losses exceeding your initial deposits. Saxo does not provide financial advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo does not take into account an individual’s needs, objectives or financial situation. Please click here to view the relevant risk disclosure statements.

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-hk/about-us/awards.

The information or the products and services referred to on this site may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and services offered on this website are not directed at, or intended for distribution to or use by, any person or entity residing in the United States and Japan. Please click here to view our full disclaimer.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc. Android is a trademark of Google Inc.