The Dow is Quiet as Markets Anxiously Await Netflix Earnings

The Dow Jones Industrial Average was quiet Monday as the markets look to Netflix after the bell.

Jay Jenkins
Jay Jenkins
Apr 21, 2014 at 1:00PM

Seventeen of the 30 Dow Jones Industrial Average (DJINDICES:^DJI) companies were up in early afternoon trading Monday as the index itself was up 25 points.

The quiet session came at the markets prepare for the heart of earnings season. A host of blue-chip stocks release earnings this week, and investors spent Monday morning catching up from the long weekend in anticipation of these results.

$100 billion megamerger
A British newspaper attempted to steal some of the day's earnings thunder, though, reporting that Pfizer (NYSE:PFE) had approached AstraZeneca (NYSE:AZN) to propose a potential acquisition valued at over $100 billion. 

The London Sunday Times report caught the markets off guard. While the report said talks have ended, the fact that these executives considered the deal with any seriousness is a positive sign for corporate capital markets.

Pfizer moved 1.2% higher this afternoon on the news. AstraZeneca's cancer drug pipeline, plus cost synergies and a favorable capital structure, could immediately boost earnings at Pfizer. Many in the industry expect Pfizer to return to the table to make a deal work, so this is a story that we'll likely hear more about over the coming weeks and months.

All eyes on Netflix

Netlfix (NASDAQ:NFLX) is scheduled to release first-quarter earnings today after the closing bell. Netflix has long been a darling of those bullish on Internet technology disrupting existing industry, and in recent years a bet on the video streamer would have paid off handsomely (so long as you are comfortable with the occasional roller-coaster ride).

The big-picture bet is that Netflix can successfully compel traditional cable TV subscribers to "cut the cord" and turn to the Internet for all of their video entertainment. This requires Netflix to defeat not only other online outlets, but also entrenched industry players in the cable and television programming business.

NFLX Chart

NFLX data by YCharts.

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To win on all of these fronts, Netflix has created a slate of original programming to distinguish its service from the other players. 

Season two of its original show "House of Cards" was released in February, and the Street is particularly looking at first-quarter earnings and new subscribers as validation of this award-winning hit.

The market will be watching new subscribers
Analysts in one survey said they expect Netflix to add 2.25 million new subscribers in the quarter. That number, likely more than any other, will dictate how the market reacts to the release. If new subscribers come in low, expect Netflix to take a dive.

However, over the long term this outcome could be just another buying opportunity. Netflix is deadlocked with YouTube as the leading online video sites. Together, according to a study by RBC Capital Markets, these two outlets control 87% of this market (44% for Netflix, 43% for YouTube). 

What's perhaps even more impressive is that YouTube is free, while Netflix is accessible only by subscription. That Netflix can control that much viewership via an exclusive group of users indicates the quality of its product and an uncanny ability for retain subscribers. 

Netflix is a volatile stock (check out the chart above again, in case you forget). However, the data makes clear its product resonates with viewers. Given the high profile of the stock, it is critical to step back and make sure you consider the long term. 

Cable subscriptions are declining. Eyeballs are increasingly moving to online channels. Netflix and YouTube rule online video. Can Netflix's original programming continue to drive people away from the cable box and to the Web? Only time will tell, but this Fool is optimistic.