Netflix, Inc. (NASDAQ:NFLX) will release its fourth-quarter earnings report this afternoon. All eyes will be on how the company’s subscription price hike effects subscriber numbers. Back in October, Netflix said it expects to add six million subs in the fourth quarter.
Did the most recent price hike have the same effect as the last one? Netflix stock bulls certainly don’t think so.
If you remember the prior hike, subscribers were up in arms about the increased prices. NFLX stock was also beaten lower as a result due to an expected dip in subscriber growth. This time, however, Netflix stock is up more than 10% since announcing the subscription price hike. What’s more, social media channels have been mute on the subject.
This bodes well for Netflix’s projected subscriber growth, and for the company’s bottom line. However, earnings could still be impacted by the company’s aggressive spending on content. Netflix plans to spend between $7 billion and $8 billion on content creation and acquisition this year, well above last year’s budget of $6 billion.
Turning to expectations, Wall Street is looking for a profit of 41 cents per share from Netflix, a year-over-year surge of 173%. Revenue is expected to rise 32.5% year-over-year to $3.28 billion. The whisper number comes in at earnings of 43 cents per share.
But guidance will be key, especially with competition heating up after Walt Disney Co (NYSE:DIS) gained a 60% controlling stake in Hulu.
Click to Enlarge Sentiment remains quite bullish on Netflix stock despite these concerns. According to Thomson/First Call, 25 of the 41 analysts following Netflix stock rate the shares a “buy” or better. The 12-month price target rests at $222.73, just above NFLX’s current perch. There is room for both upgrades and price-target increases, so long as Netflix hits subscriber targets and issues solid guidance.
There is a concern on the technical front, however. Netflix stock has been in rally mode since the beginning of 2018. As a result, the shares are now trading firmly in overbought territory.
The shares have stalled near $220 in the past several sessions, but this consolidation hasn’t been enough to work off overbought conditions. As such, traders should be wary of a sell-on-the-news event.
Turning to the options pits, weekly Jan. 26 implieds are pricing in a potential post-earnings move of about 7.76%. This places the upper bound at $237, while the lower bound lies at $203.
Short-term support lies at $210, with additional support at $200. Meanwhile, resistance resides in the $230-$235 region.
2 Trades for Netflix Stock
Call Spread: For those looking to bet on a breakout to fresh all-time highs for Netflix stock following earnings, a Feb $225/$230 bull call spread has potential. At last check, this spread was offered at $1.95, or $195 per pair of contracts. Breakeven rests at $226.95, while a maximum profit of $3.05, or $305 per pair of contracts — a potential return of 57% — is possible if NFLX stock closes at or above $230 when February options expire at the end of next week.
Put Sell: Alternately, if a sell-on-the-news even worries you, a February $200 put sell has a high probability of finishing out of the money. At last check, this put was bid at $3.04, or $304 per contract. As usual with a put sell, you keep the premium as long as Netflix stock closes above $200 when February options expire.
On the downside, if NFLX trades below $200 prior to expiration, you could be assigned 100 shares for each put sold at a cost of $200 per share.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
