Earnings season begins to gain momentum later this week, with online streaming giant Netflix (NFLX) buried in the mix. Netflix stock has taking a bit of a beating this week, as traders flee from the current market correction, but the company has a chance to reinvigorate investors Wednesday evening with the release of its third-quarter earnings report.
For the record, Netflix is expected to post a profit of 93 cents per share on revenue of $1.41 billion, up sharply from year-ago earnings of 52 cents per share and revenue of $1.11 billion. Digging a bit deeper, Netflix is seen adding 1.472 million subscribers domestically and 2.387 million internationally.
There doesn’t seem to be much doubt that the company will hit these targets. In fact, EarningsWhisper.com places Netflix’s third-quarter whisper number at 98 cents per share.
If Netflix stock takes a post-earnings hit on anything, it will be because of margin pressures. Specifically, content acquisition and generation, expansion internationally and fees paid to Internet service providers could squeeze Netflix’s margins a bit more than some on Wall Street are able to stomach.
But you have to spend money to make money, and any dip because of margin pressures could be seen as a buying opportunity for long-term investors.
Turning to the sentiment backdrop, it seems that NFLX is a perennial whipping boy for Wall Street. Within the brokerage community, Netflix stock has attracted 20 “hold” or worse ratings, compared to just 19 “buys.” Additionally, the 12-month consensus price target of $500 represents a premium of only about 14% to NFLX’s close at $438.58 on Monday.
Elsewhere, short sellers are continuing their campaign against the stock. Despite a minor decline during the most recent reporting period, some 5.9 million shares of Netflix stock remain sold short. Representing more than 10% of NFLX’s total float, these shorted shares could provide ample fuel for a short-covering rally.
Options activity on Netflix stock also is skewed toward the bearish camp, with put open interest spiking during the past week’s broad market selloff. As a result, the October put/call open interest ratio has risen to a lofty perch of 1.01, with put open interest narrowly edging out call open interest heading into Netflix’s quarterly report. Currently, the most popular put is the Oct $440 strike, which sports 3,054 contracts, while the Oct $430 strike arrives at a close second with open interest of 2,352 contracts.
Click to Enlarge Technically, NFLX is off its recent highs near $475, with the stock dipping below support at its 20-week moving average. Still, the shares have support near $425 and $400, with the stock’s 52-week moving average calling the latter region home.
Overall, these technical levels correspond pretty well with what options traders are pricing in for a potential post earnings move for Netflix stock. According to October implieds, NFLX is expected to move roughly 8% following tomorrow’s earnings announcement, placing the upper bound at $475.50 and the lower bound at $404.50.
When trading NFLX, I’m inclined to take the wealth of pessimism levied against the stock with a grain of salt. After all, quite a few talking heads on Wall Street have made a living out of dooming-and-glooming the stock, only to see it continually rise.
Still, the current turbulence and sell-happy sentiment on the Street is a bit unsettling.
2 Trades to Make on Netflix Stock
Call Spread: For those traders willing to take a chance on Netflix stock, a Nov $440/$475 bull call spread stands a fair change of turning a considerable profit. At last check, this spread was offered at $14.32, or $1,432 per pair of contracts. Breakeven lies at $454.32, while a maximum profit of $20.68, or $2,068, is possible if NFLX closes at or above $475 when November options expire.
Selling Puts: Alternately, if the current market headwinds have you worried, you could look into a put sell position. Along those lines, a Nov $400 put sell might be a way to capitalize on NFLX’s multiple levels of technical support. After the close last night, the Nov $400 put was bid at $10.45, or $1,045 per contract.
The upside to this put sell strategy is that you keep the premium as long as Netflix stock closes above $400 when November options expire. The downside is that should NFLX trade below $400 ahead of expiration, you could be assigned 100 shares for each Nov $400 put sold at a cost of $400 per share.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
