The granddaddy of online streaming will join the earnings parade next week, and Netflix, Inc. (NASDAQ: NFLX) had better be ready for a breakout. Netflix stock is up more than 50% so far this year, and the bull run is showing no signs of slowing down. With better-than-expected results on the way Monday, look for NFLX to top $200 and rally further into all-time high territory.
Diving straight into the numbers, Netflix is expected to post a profit of 32 cents per share for the third-quarter — more than doubling last year’s earnings of 12 cents per share in the same period. What’s more, revenue is seen soaring nearly 30% to $2.97 billion.
NFLX news over the past couple of weeks has focused on the company’s increased content spending plans. Many analysts have cited rising spending as a negative for NFLX stock, but subscriber gains up to this point have more than justified Netflix’s business model.
What’s more, the company recently announced it was hiking prices to help offset its increased spending plan. The last time Netflix announced a price hike, customers were appalled and a public backlash dogged subscriber growth for more than a quarter. This time around, there was practically no subscriber outcry as subs are finally realizing the value Netflix service provides for the relatively low cost.
But U.S. subscriber growth isn’t the real driver for Netflix. The company is global now, and international subscriber growth shocked analysts in the second-quarter, prompting a surge in Netflix stock as a result. Third-quarter figures should provide similar results for NFLX shares.
Checking in with sentiment, it’s clear Wall Street’s view is shifting. NFLX bears are being squeezed out of their short positions, with short interest plunging 10% in the most recent reporting period. That said, some 26.5 million shares of Netflix stock are still sold short, making up nearly 7% of the stock’s total float. A breakout above $200 following earnings could put the nail in the coffin for these remaining short sellers.
There is also room for improvement on the analyst front. According to Thomson/First Call, 17 of the 42 analysts following Netflix stock rate the shares a “hold” or worse despite the company’s strong performance so far this year. Additionally, the 12-month price target for NFLX stock rests at $194.84 — a discount to Thursday’s close. Look for analysts to lift both their ratings and price targets following another solid quarterly report.
Click to Enlarge Turning to the options pits, we find more lingering Netflix stock price bears. Currently, the October put/call open interest ratio rests at a lofty 1.09, with puts outnumbering calls among those options most affected by Netflix’s quarterly report.
In fact, most bears are targeting the Oct $170 and $165 strikes — both deep out of the money. The only major overhead call strike is the Oct $200 strike, meaning that once NFLX breaks above this area, it could be off to the races.
Overall, October implieds are pricing in a potential post-earnings move of about 8.3%. This places the upper bound at $211, while the lower bound rests at $179.
Short-term support lies at $190, with additional support in the $180-$185 region, making a dip to $179 unlikely barring any significantly bad news. Meanwhile, resistance could be stout at $200, but a break above this area could see Netflix stock rally well past $211 as pessimism unwinds and shorts rush to cover.
Meanwhile, resistance could be stout at $200, but a break above this area could see Netflix stock rally well past $211 as pessimism unwinds and shorts rush to cover.
2 Trades for NFLX Stock
Call Spread: For those looking to bet on a breakout to fresh all-time highs for Netflix stock following earnings, an Oct $200/$210 bull call spread has considerable potential. At last check, this spread was offered at $3.03, or $303 per pair of contracts. Breakeven rests at $203.03, while a maximum profit of $6.70, or $670 per pair of contracts — a potential return of 103% — is possible if NFLX stock closes at or above $210 when October options expire at the end of next week.
Put Sell: Alternately, if resistance at $200 worries you, an Oct $177.50 put sell has a high probability of finishing out of the money. At last check, this put was bid at $1.64, or $164 per contract. As usual with a put sell, you keep the premium as long as NFLX stock closes above $177.50 when October options expire.
On the downside, if NFLX trades below $177.50 prior to expiration, you could be assigned 100 shares for each put sold at a cost of $177.50 per share.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
