Online entertainment giant Netflix (NFLX) will slip into the earnings confessional after the close of trading this afternoon. Wall Street appears to have set the bar pretty high for Netflix’s third-quarter report, with earnings expected to rise 254% year-over-year to 46 cents per share. Revenue is seen rising 21% from the same quarter last year to $1.14 billion.
But there are whispers on Wall Street that Netflix’s earnings could be even higher. Specifically, EarningsWhisper.com reports that the company’s third-quarter whisper number arrives at 55 cents per share — 9 cents better than the consensus.
Despite these high earnings expectations, the rest of Netflix’s sentiment backdrop is heavily bearish. For instance, data from Thomson/First Call reveals that analysts have doled out only seven “buys,” compared to 22 “holds,” and six “sell” ratings. Additionally, the consensus 12-month price target of $250 represents a discount of 25% to Friday’s close at $333.50.
Pessimism is also thick in the short-selling community. Currently about 7 million NFLX shares are sold short, representing 13.33% of the stock’s total float, or shares available for public trading. This wealth of short interest could provide ample fuel for a potential short-covering rally in the event that Netflix’s third-quarter report drives the stock higher.
Turning to NFLX’s options configuration, we find a bit of growing optimism. Currently, there are about 48,419 calls open in the October/November series of options (including weekly options), compared to 40,618 puts. The result is a put/call open interest ratio of 0.84, a figure that is down sharply from a reading north of 1.30 at the beginning of October.
One reason for this rise in short-term call open interest could be that short-sellers are buying calls to hedge their bets. But whether the activity is coming from short-sellers or just normal call-buying ahead of earnings, it would seem that options traders are expecting a post-earnings rally from NFLX shares.
Judging from weekly October implieds, that move could be rather large. Specifically, implieds are pricing in a potential post-earnings move of more than 12%. This places the upper bound near $375.75, while the lower bound rests at $291.25.
Taking a look at NFLX’s technical backdrop, you can see that the shares have been in rare form. Since the beginning of 2013, NFLX has rallied more than 260%, bolstered by support from its 10-, 20- and 50-day moving averages. The stock is currently in the process of rebounding from its 50-day moving average, with NFLX now trading in all-time high territory north of $330.
Traders looking to capitalize on NFLX’s third-quarter report will want to proceed with caution. The stock has rallied sharply heading into tonight’s report, and positive results may already be priced in. That said, it is hard to bet against the shares in light of the wealth of pessimism levied against this outperforming stock. As such, those traders looking for a contrarian play might want to consider a 330/370 bull call spread.
At the close of trading on Friday, this spread was offered at $15.45, or $1,545 per pair of contracts. Breakeven lies at $345.45, while a maximum profit of $24.55, or $2,455 per pair of contracts, is possible if NFLX closes at or above $370 when November options expire.
At the time of publication, Hargett had no positions in the securities mentioned.