By Jacob Sonenshine

Although Netflix's earnings pumped its stock higher, they highlighted one issue that will be important for the rest of the market. Many companies are about to feel the pain.

The streaming company's sales and earnings, disclosed late Tuesday afternoon, came in higher than expected, helping push the stock up 11% from before the results landed.

Management's financial guidance showed no signs that growth is slowing down, quite a feat for a company that produced $39 billion in 2024 revenue. Netflix forecast that 2025 revenue will land in a range with a midpoint of $44 billion, above the $43.5 billion it expected earlier, implying 13% year-over-year growth.

On the surface, that looks like a slowdown from the 15.6% growth achieved in 2024, but that is because a rising U.S. dollar weighed on management's forecast. The buck has risen against the euro, the yen, and other currencies as U.S. economic growth pulls ahead of growth overseas.

The higher dollar reduces Netflix's foreign sales in U.S. dollar terms. That dynamic reduced management's 2025 sales forecast by $1 billion, or 2%, it said.

Excluding the impact of currency lands 2025 guidance at $45 billion, implying just over 15% growth. This shows that Netflix is on fire right now.

The majority of its growth is coming from more people signing up for paid subscriptions, regardless of mild price increases and the ramp-up of advertising for certain plans. Netflix, which is holding its own against emerging competitors such as Disney's Hulu and Comcast's Peacock, is a standout in its industry.

But most companies aren't. The dollar will hurt globally exposed companies such as Meta Platforms, Alphabet, Etsy, eBay, and Pinterest, all of which see at least a third of sales come from outside the U.S.

"We don't see specific read-thrus [from Netflix's earnings] for other internet names, other than that foreign exchange will be a material headwind," writes Evercore analyst Mark Mahaney.

The S&P 500 is full of companies that get much of their revenue abroad. According to FactSet, 40% of component companies' aggregate revenue came from overseas.

Tons of companies will therefore report lower earnings than they would have if the dollar hadn't gained so much. If the dollar reduces companies' sales by a percentage in the low single digits, earnings would take a slightly larger hit. That is because companies aren't likely to change how they operate, so they won't seriously seek to cut costs just because currency translations are denting revenue. Profit margins would suffer.

Many companies that generate sales overseas are about to report fourth- quarter earnings. Those that see more than one-third of their sales from outside the U.S. and are scheduled to report their earnings between next week and March include MicroStrategy, Hewlett Packard Enterprise, Getty Images, the software company Pegasystems, Exxon Mobil, and Chevron.

If these companies aren't aggressively defending, or increasing, their market shares in their respective industries the way Netflix is, the stronger dollar will loom larger in their outlooks for revenue and earnings.

The oil producers are especially at risk. They not only have to translate foreign sales into a stronger dollar, but global oil demand is also weaker when the greenback is stronger because oil prices are denominated in dollars. That makes crude more expensive to buy when the dollar goes up. In the few months that the dollar has risen, the price of oil has gained, and is now vulnerable to weakness from any number of headwinds, including currency fluctuations.

The dollar has become a true annoyance. Just incorporate this into expectations for companies' earnings and stock prices.

Write to Jacob Sonenshine at jacob.sonenshine@barrons.com

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January 23, 2025 13:49 ET (18:49 GMT)

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