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When stock markets closed on January 19, 2021, Netflix posted a press release with its end-of-year financial results. Business is booming, the message went. About a year into the coronavirus pandemic, the company had provided “escape, connection, and joy” to more than two hundred million subscribers. A New York Times journalist had an hour to review Netflix’s earnings report: eleven pages, half corporate-speak, half dense tables filled with accounting metrics—some of them standard, some invented. During after-hours trading, Netflix stock began to rise.
The pressure was on to explain the numbers while standing firm against salesmanship. In its release, Netflix had highlighted operating income. That excluded hefty interest on its debt (the company had borrowed sixteen billion dollars to fund a spree of shows) and the expense of taxes (a year before, Netflix had quadrupled its profit by emptying a tax reserve that it had only recently stuffed). But Netflix’s finance whizzes had turned straw into gold. The Times story duly noted the company’s rising operating income, not the fact that profit was down 8 percent for the quarter—and the drop looked even steeper when compared with the burgeoning sales. (Netflix declined to comment for this piece.) Profit wasn’t discussed in the release; the number appeared as the bottom line of a required financial statement.
But in Silicon Valley, where Netflix is based, growth is king. The pandemic had delivered a boost to subscriptions and paused new productions; without crews to pay, Netflix had piled up extra cash. The company announced, in bold type, “We believe we no longer have a need to raise external financing for our day-to-day operations.” The Times noted that Netflix would still have ten billion to fifteen billion dollars in debt, but said that the company “made enough revenue to pay back those loans while maintaining its immense content budget.” Netflix now makes enough to repay its debt, the story went; “the gambit seems to have worked.”
The article was written, edited, and posted in seventy-eight minutes. Alas, it was wrong. Netflix, in fact, had said that it would pay off only the part of its debt coming due—a billion dollars—and “explore” using the rest of its cash to buy back its stock. (A Times spokesperson said that the paper stands behind its reporting.)
Markets move on the mere suggestion of buybacks, since fewer shares in circulation means that each is worth more. The next day, January 20, Netflix shares gained 17 percent and set an all-time high. The company’s executives stood to make millions more from their shares than from their salaries and bonuses combined.
No one is dumb in this story. Nor is the situation unique: the Wall Street Journal, the Associated Press, and the Financial Times all led with Netflix’s subscription boom; none mentioned the drop in profit before the eleventh paragraph. Consistently, and across the press, the rush to cover corporate earnings sets journalists up for failure.
Earnings coverage did not always work this way. In the nineties, when I started out as a business reporter, journalists could lean on sell-side analysts, as they were known, who worked for banks that issue stocks and bonds for companies. It was their job to help us understand corporate strategy and to warn of red flags. They toured factories and took meetings with executives; they connected the numbers on an earnings report to the actions of CEOs, supply chain snafus, demographics, and emerging technologies. (They also had a legion of highly educated, sleep-deprived underlings who supported their work.)
These analysts focused closely on about a dozen companies, producing reports with the scope, depth, and insight of book chapters. “I would read them cover to cover,” Micheline Maynard, a veteran business writer for the Times and former contributing columnist at the Washington Post, recalled. Seasoned reporters found ways to sidestep obvious conflicts of interest, knowing that analysts would recommend that clients buy stocks their banks were selling. In effect, Wall Street was policing itself.
There were pitfalls to that arrangement, of course, as the dot-com crash of 2000 showed. Henry Blodget—Merrill Lynch’s chief internet analyst, who went on to found Business Insider—famously recommended shares of companies he’d mocked to colleagues in emails as junk. (Blodget eventually sold Business Insider to Axel Springer for 450 million dollars.) In 2002, Eliot Spitzer, who was then New York’s attorney general, reached a 1.4-billion-dollar global settlement that barred banks from compensating analysts based on sales, or even letting them talk to sales representatives. Full-disclosure regulations required companies to tell all investors what they told one.
After that, banks began axing their research departments, just as publishers were shrinking newsrooms. The financial crisis of 2008 and 2009 led to more bloodletting and consolidation, with fewer companies listed on public stock markets, and fewer people buying individual stocks than a slice of the market through index funds. According to Vali Analytics, which researches the financial services industry, in the past decade, the world’s fifteen biggest banks have shed a third of their analysts. In 2017, when a European Union regulation banned banks from bundling research costs into trading fees, according to Substantive Research, a London-based market research firm, research budgets were cut in half. Star analysts with dedicated associates were replaced with teams covering twenty companies or more.
It’s an assembly line: One person listens to quarterly earnings calls with executives. Another checks news that could affect the company’s customers, suppliers, or competitors. One plugs earnings numbers into a spreadsheet. Only the head of the team makes calls—and the calls are narrow, predicting short-term earnings. These judgments are made within minutes. Earnings often beat expectations—mostly in alignment with companies’ guidance—which enables analysts to recommend that clients buy shares. That, in turn, sends stock prices up. For journalists, these recommendations are mostly useless.
And yet few business reporters, even at elite news organizations, understand the implications of all this change. Market news sites still churn out stories on individual stocks based on sell-side research. When a company’s numbers beat Wall Street estimates (set within a range the company provided), that typically becomes a story’s lede. Michael Brush, a columnist for MarketWatch, observes a persistent conflict of interest: “There’s a huge incentive for a research analyst to be bullish on stocks their banks sell,” he said. Still, he pays attention—he ignores the stock advice, but tunes in for the intel on emerging technology and drug trials.
Journalists need to be numerate as well as literate. As corporations amass power and move their operations around the globe, the public cannot count on federal regulators to hold private entities to account, much less Wall Street analysts. The fact that American companies are required by law to report their finances in a press release every three months sends a clear message: the government expects reporters to help people understand the significance of the numbers.
Too often, though, business reporters lack the capacity—because of time pressure, resources, or both—to grapple with what the numbers mean. Ultimately, that gives the private sector a pass. That can be true even of investigative work—for instance, “Capital Assets,” a 2023 Pulitzer Prize–winning Wall Street Journal series on federal employees who trade in the stocks they regulate. The project drew upon tens of thousands of public records of federal employees’ trades, but not from disclosures posted by the Securities and Exchange Commission, to see if executives or board members had disclosed buying and selling shares in their companies ahead of government contracts. Journalists’ tendency to direct attention on public officials, as opposed to powerful corporate leadership, can unwittingly propel the myth that the business world is more effective and efficient, and that markets can be relied on to check bad corporate behavior.
Reporters also need to slow down. Even Wall Street analysts, expected to render judgments within minutes, find it hard to work so fast. Most ignore one-off charges, such as severance for layoffs or selling off unprofitable businesses. In reality, this is where CEOs hide their skeletons, and journalists should pay extra attention.
After the January 19, 2021, Netflix earnings release, nineteen banks and investment houses raised their price target for the company and recommended their customers buy shares. Things didn’t go well for the surge of buyers the next day, who paid a record sum. By January 21, Netflix shares dipped—and didn’t recover until that September. The price fell again and didn’t surpass that record price until March 2024. In fact, anyone who bought Netflix after reading about the company’s earnings would have done far better buying into the benchmark S&P 500 index. Netflix’s returns lagged the index for four years, until the end of last year—a stretch when other tech and media companies beat the market.
This past January, Netflix reported a subscription blowout, topping three hundred million. The company’s stock reached a record high. The coverage gushed. Few stories noted that this marked the last time Netflix would report subscriber numbers—a sign that those numbers are headed south. The company, which long asked to be judged by growth, now wants to be judged by profit. Ultimately, it should be journalists who decide, based on what all the metrics show.
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