Event: NFLX reports Q4 earnings tonight after the close, the options market is implying about a 12.15% move which is light to the 4 qtr avg move of ~18% and the 8 qtr avg move of ~17%. With the stock trading at ~$100 the Jan25th 100 straddle is offered at $12.15, which suggests that you would need a $12.15 up or down by Friday’s close to make money.
Sentiment: Despite the stock’s fancy new activist shareholder (Icahn took a 10% stake in the company in late Oct) and the stock’s subsequent 50% rally, Wall Street analysts remain fairly downbeat on the stock with only 6 Buy ratings, 21 Holds and 11 Sells, with an avg 12 month price target that is 25% below the current stock price.
Fundamentals / Valuation: 2012 saw a dramatic earnings deceleration as the company grappled with their continued transition to streaming, and the associated costs with their international expansion. While analysts expect earnings to grow 40% in 2013, they remain ~20% below peak earnings back in 2011. while sales are expected to grow only 12-14% for the next 3 years. Given expected growth rates, it is hard to how NFLX can ever grow into its forward 2014 PE of 77.
Price Action / Technicals: The stock is up nearly 90% off of the 52 week lows made this part summer, and up 10% in 2013 a lone. While much of these gains have little to do with improving fundamentals, the addition of new shareholders and the continued high short interest (25%) make the stock a challenge for shorts.
The 2 year chart below clearly shows the stock flirting with a long-term resistance level that could serve as a pivot point up or down 10% in a heartbeat.[caption id="attachment_21868" align="aligncenter" width="490"] NFLX 2 yr chart from Bloomberg[/caption]
Volatility: The Jan25th weekly options are nearly 180 vol. February is about 70 and March about 57. The average across all months stands around 70, which is historically high but NFLX has seen crazier vol over the past 2 years:[caption id="attachment_21866" align="aligncenter" width="577"] 1 Year HV30 vs IV30 from LiveVol Pro[/caption]
Outer month vol should fall to the low 50’s following the report. Near term vol, especially the weeklies are pricing in the event move and should be treated as such.
Expectations From Bloomberg:
- 4Q GAAP loss/shr 13c (range loss 24c to profit of 2c)
- 4Q rev $934.5m (range $926m-$946m)
- 1Q GAAP loss/shr 7c (range loss 22c to profit of 12c)
- 1Q rev $969.2m (range $870m-$1.02b)
Q4 Subscriber Guidance from 10/23:
-Total Subs: 26.4m to 27.1m, implying net adds 1.3m-2m
-Total Subs: 5.2m to 5.9m, implying net adds 890k-1.59m
-Total Subs: 7.85m to 8.15m, implying loss of 460k-760k
MY VIEW: This is not a stock I would buy on its existing fundamentals, that said I am sure Carl Icahn and his people know a whole heck of a lot more than I do, as they have clearly put their money where their mouth is with last year’s 10% stake. That said this the same activist investor that saw value in DVD rental company Blockbuster in the mid part of last decade. While directional bets with options look challenging, calendars, selling weeklies to buy longer dated look like high probability plays into tonight’s print. Stay tuned as we evaluate a few different trades.