Netflix (NFLX) and Apple (AAPL) have spoken — they have announced their earnings. The trading dust is settling — are they good investments and possibly good trades, are they great investments or great trades, or should you stay away?
Apple is a fabulous long term investment. Netflix is a very good, very short-term trade. The common denominator for the two companies is growing market saturation that will slow revenue growth and, in the case of Netlfix, profit growth. I expect Apple to expand its product line to include lower cost iPhones , reducing unit and gross margins but boosting overall profitability on a per share basis. The opposite is true for Netflix — the company has been beyond brilliant in re-inventing itself but every re-invention incurs a structural increase in long term costs that does not work well with a slowing growth model.
What to do?
First, let’s look at how to trade NFLX. I’ll start with a comment from the company in their annual report, put in by lawyers but relevant nonetheless. “A decline in our rate of growth could indicate that the market segment for online subscription-based entertainment video is beginning to saturate. While we believe that this segment will continue to grow for the foreseeable future, if this market segment were to saturate, our business would be adversely affected.” You got that right. Where am I going with this?
- In the face of market saturation the company has to keep subscribers longer and make them pay more. They also need to…
- figure out how to grow the market at a lower cost than it has to date and if they…
- put those two needs together and become the number one “Internet to TV” brand.
NFLX will accomplish this but not without pain to investors. The debate about the extent of the pain is underway and that is your short term trading opportunity. I think the stock will bounce back to $250, so sell some $240 puts, looking at every short term strike. Next week or the week after, you can get almost 2% returns, and where I went to school — PS 269 in Brooklyn — Mrs. Levine said fifty times two equals an 100% annualized return. Warning – if I am wrong, consider taking a capital loss on the puts, this stock will slide into a crash, it sells for more than sixty times earnings and it will be years before their next re-invention pans out for investors.
On to Apple. Nothing to say except this is the cheapest — the company sells at a 50% discount to the S&P 500 — terrific company on the planet. They are going to beat earnings the next few quarters, they will announce major new products in the coming few quarters and they will probably spend more cash to buy shares or increase their dividend in the next few quarters. They catalyst? The day more investors are interested in the shar6es than traders – and I expect that to happen this year. What to do? Buy shares and sell calls. If you bought the stock today, sold an August call a couple of strike prices out, and did this twelve times a year, you would net 13% – plus the near 3% dividend – plus, if you are nimble, the potential underlying appreciation in the stock.
I am biased — I am writing this on a Mac mini, I used a Mac Air on my recent trip to Europe, I watch Netflix on my iPad and yes, I have an iPhone. I also own Apple shares.
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