Diamonds and Dogs

10/17/18

Netflix (NFLX) soars as they continue to spend billions. Netflix is up 6% as they beat earnings estimates while sales rose 34.0% year over year to $4 billion. Net subscribers added 6.96M vs 5M guidance, 1.09M in US vs 650K guidance. 5.87M International vs. 4.35M guidance. Operating margins expanded 500 bps to 12%, but the company is spending money like its water. Anticipate free cash flow will be a negative $3 billion this year and anticipates similar negative free cash flow next year. In the short term, the stock and subscriptions looks good, but eventually the company will need to stop spending money they don't have.

Big Blue having a tough day. IBM (IBM ) is down 7% to a 2 ½ year low following earnings. The company beat expectations, but sales declined 2.1% year over year to $18.76 billion. The revenue dip did not come as much of a surprise to many analysts, who expected a decline for the quarter. But revenue still dropped below estimates. Prior to this quarter, IBM had sustained three consecutive quarters of revenue growth, in part due to the introduction of a new mainframe computer. Previously, IBM had five straight years of year-over-year revenue declines. Good news is IBM remains very profitable with strong cash flow of $12 a year. Now the company needs new products to boost sales going forward.