The third-quarter numbers from Netflix (NASDAQ:NFLX) were always going to be crucially important to the market. In particular, they were important to FANG stocks and other tech and growth-oriented names.
This whole sector of the market has been under pressure from rising interest rates diluting the present value of down-the-road profits and dragging equity valuations lower. But, the theory was that if Netflix’s Q3 numbers were good and the stock rallied, that could be a huge turning point for FANG stocks and the whole tech/growth sector.
Well, Netflix reported not just good, but great, Q3 numbers, and Netflix stock popped.
But, FANG stocks failed to rally. The whole Nasdaq is down slightly as of this writing. So was the theory wrong? Will a strong Netflix report not save FANG after all?
I wouldn’t draw that conclusion. The drop in tech/growth stocks following Netflix’s robust Q3 print isn’t all that surprising. Before the print, the whole Nasdaq rose nearly 3% in a single day. That is a huge gain. In context, it isn’t unreasonable to see FANG stocks pullback the next day.
But make no mistake, Netflix’s blowout report is a good thing for FANG and the whole tech/growth sector. The report shows that all is well in the technology sector, and that the growth narratives therein are about as good as ever. Thus, as rising rates cool off over the next several weeks and tech companies report blowout earnings after blowout earnings, all these beaten-up growth/tech stocks should stage sizable comebacks.
Netflix’s Quarter Shows FANG Stocks Are Still Great
I’ve long been of the belief that tech stocks deserve their big valuations because these companies represent the future.
When you think about technology and all the areas it’s spreading to, you start to realize that the technology growth narrative is still in its early innings. Think about the cloud, and how workloads across the globe are shifting at an accelerated pace to the cloud. Think about AI, and how every company in the world now is trying to employ data-driven AI solutions to improve operations. Or, think about digital engagement and IoT, and how every consumer in the world is becoming increasingly dependent on technology for everyday things.
No matter where you look, technology is the future. As such, tech stocks are the future. When you look at it this way, it becomes clear to see that digital advertising giants like Facebook (NASDAQ:FB) and Google (NASDAQ:GOOG), e-commerce behemoths like Amazon (NASDAQ:AMZN) and Wayfair (NYSE:W), digital payments leaders like Square (NYSE:SQ) and PayPal (NASDAQ:PYPL), cloud service providers like Salesforce (NYSE:CRM) and Adobe (NASDAQ:ADBE), and streaming giants like Netflix and Roku (NASDAQ:ROKU) all have robust long-term growth potential as their spheres of influence grow over the next several years.
Thus, near-term weakness is nothing more than a long-term buying opportunity. The question is: when to buy?
Netflix’s Q3 report answered that question for us. The time to buy is before earnings. Netflix’s report — which showed essentially zero slowdown across all of the company’s core operating metrics — underscored that the growth narratives in tech broadly remain as robust as ever. In other words, rates might be spooking valuations on Wall Street, but the widespread adoption of technology services on Main Street isn’t slowing at all.
Expect Big Rallies This Earnings Season
It wasn’t until Netflix reported blowout Q3 numbers that Netflix stock rallied in a meaningful way and took back significant ground lost in the recent selloff. Expect the same with other FANG names and tech stocks.
The market is taking a “show me” approach to FANG and tech stocks right now. Investors aren’t assuming earnings and guidance will be great. They are waiting for Facebook, Amazon, Google, Wayfair, Square, PayPal, Salesforce, Adobe, Roku and others to show them that earnings and guidance are great.
If Netflix’s report says anything, it is that most of those companies will report great numbers and give strong guides. After all, if Netflix reported great numbers, that means more people than ever are using streaming services. The trend of streaming service adoption has historically run parallel to the trends of e-commerce adoption, social media engagement, enterprise cloud adoption, digital payment service usage, so on and so forth.
There is no reason to believe these parallels broke this past quarter, especially considering the world economy is healthy at the moment. Thus, it is reasonable to expect strong numbers from FANG and other tech stocks this earnings season. Considering these stocks have been beaten and bruised over the past few weeks, strong numbers should spark healthy rallies. See Netflix stock and Adobe stock.
Bottom Line on FANG Stocks
Netflix’s strong Q3 report is a healthy leading indicator for FANG stocks. I fully expect FANG and other tech stocks to report solid quarterly numbers over the next few weeks, and also expect those solid quarterly numbers to spark healthy rallies across the board in tech.
As of this writing, Luke Lango was long FB, GOOG, AMZN, SQ, PYPL, ADBE, and ROKU.
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