$NFLX Q1 Earnings Preview

by Dan April 22, 2013 11:19 am • Commentary

Reminder: Enis and I will be Hosting a Free Webinar Tonight at 4:15pm EST previewing AAPL’s Q2 earnings report and we will debate options trade structures that we are considering to play the event.  Register here:  http://goo.gl/I93Ay


Event:  NFLX reports Q1 earnings tonight after the close, the options market is implying about a 15% move, *which is shy to the 4 qtr avg move of ~23% and the 8 qtr avg move of ~20%.

*With the stock around $170, the at the money weekly straddle is offered at $26, if you bought that you would need the stock on Friday’s expiration to be above 196 or below 144 to make money, or about 15% either way.   

Sentiment:  Despite the stock’s 85% ytd gains, Wall Street analysts remain very mixed to cautious on the stock with 11 Buys, 19 Holds and 9 Sells with an average 12 month price target of ~$160, below where the stock is trading now.  Short interest sits at ~14% which is at nearly the lowest levels in a year.

Price Action / Technicals:   The chart is fascinating to say the least, with the range since the Q4 earnings gap representing a fairly well defined support/resistance  set up.  The lower end of support is the gap level of $140, with $160, the level which it has held since the days after the gap as the line in the sand on the downside.

NFLX 1 yr chart from Bloomberg
NFLX 1 yr chart from Bloomberg


The  major pivot point is marked with a white line, at the 175 level.  That was support in February and March, but once it broke, led  to a quick move down to 160. Going forward, the key levels to  watch are 160 for support, and 200 for resistance.  Looking at the 3 year chart below, it shows the stock’s amazing bull run, the quick descent, and now its resurrection.  It is clear by the red line that marks the long-term resistance level at $200, that it will take some significant positive fundamental developments to breach this level.

NFLX 3 yr chart from Bloomberg
NFLX 3 yr chart from Bloomberg


Fundamentals / Valuation:  Since early November, when Carl Icahn announced that he had taken a 10% stake in NFLX, the shares have more than doubled.  Whatever valuation metrics he used then to value the company then, are clearly out the window now, unless the company sees a meaningful increase in earnings.  The chart below of the Price/Earnings ratio over the last 7 years tells you all you need to know.  While the company has always traded at a massive premium to other “Net” stocks, the forward PE exploded back in 2011, right before the company had their very high profile earnings decline based on execution issues with their transition away from their core DVD business.

NFLX 5 yr Earnings vs PE from Bloomberg
NFLX 5 yr Earnings vs PE from Bloomberg


Obviously the plunge in E caused a plunge in P and the P/E went to the moon, and now sits well above average of the last 5 years.  The company will need to see a material re-acceleration in earnings for the stock to be considered a reasonable value relative to its growth.  For instance, Wall Street analysts expect earnings to grow at 100% a year for this year and next, and not get back to peak earnings of ~$5 until 2015.

Vol SnapShot: NFLX earnings have become a big event over the past year and a half with very high vol and some very big event moves in the underlying. This cycle is no different with weekly vol at 175 and May regular at 84. This is similar to what we’ve seen recently. Here’s a 2 year look at IV30 and HV30:

Screen Shot 2013-04-22 at 9.01.00 AM
IV30 red, vs Hv30 blue from Livevol Pro

May vol will get hit pretty hard and could be trading under 50 vol following the event.

Open Interest:    The call to put open interest ratio was been around 1.10 for the past month, with no major shifts.  Volumes have similarly favored calls, but only by a slight amount.  This stands in contrast to 6 months ago, when NFLX put option volume was routinely greater than call option volume, when short interest was more than double where it stands today.

MY VIEW:  To be 100% honest here, on a directional basis, this is a fairly treacherous set up for directional players.  The options are so expensive, that you could get direction right to the tune of 10-15% in either direction, but be wrong on the structure.  For vol players, the moves have been so massive that you would have to be nuts to ” sell the move”, yet there will be a report very soon that murders those who are convinced the stock will continue to move 20% or so every-time they open their mouths on an earnings call.

Here is the thing for those looking to make a contrarian play, the top 6 holders own 50% of the shares outstanding, and with almost 15% of the shares outstanding sold short, the stock will continue to be susceptible to massive short squeezes on the least bit of good news.  If the company demonstrates and guides to improved margins, and the notion that they could achieve the expected earnings growth this year and next, the first print tomo morning will be above $200.

But on the flip side, a modest Q1 beat and inline guidance will likely keep the stock range bound possibly establishing a new range below 160 and btwn the Jan gap.

At the moment I don’t see a ton of edge in the options market, but we are looking at a whole host of trade structures, we will post anything that looks attractive.



Expectations -Bloomberg Preview:


  •  1Q GAAP EPS 19c (range 6c loss-EPS 35c); Jan. 23, NFLX  forecast EPS 0c-23c
  • 1Q rev. $1.02b (range $1.007b-1.051b); Jan. 23, NFLX forecast rev. $1.004b-$1.031b
  •  2Q GAAP EPS 30c (range 2c loss/shr-EPS 51c)
  •  2Q rev. $1.06b (range $1.023b-1.092bn
  •   1Q subscriber guidance from 1/23:
  •    Domestic streaming total subs: 28.5m-29.2m
  •     International Streaming total subs: 6.6m-7.3m
  •     Domestic DVD total subs: 7.6m-8.05m


  * NFLX 1Q rev., EPS may be at or above high end of guidance as
Feb. debut of House of Cards and mid-March Facebook
integration likely drove NFLX to high end of domestic subs
guidance; cost controls should help EPS: Wedbush
* Free cash flow likely to be negative in 1Q due to
significant cash payments for original content; NFLX likely
to turn cash flow positive again later in 2013: Pacific
Crest (outperform)
* 2Q subs: 2Q likely low point for domestic streaming subs
growth in 2013 as it is seasonally slow period; guidance for
limited 2Q sub growth wouldn’t indicate decelerating
momentum: Pacific Crest
* Despite seasonally slower period in 2Q, NFLX adding Arrested
Development during qtr should help attract new members,
Barclays says (equalweight); says subs growth likely more
challenging in 2H as novelty of original programming wears
* Also watch for any color on further international expansion
plans, RBC says (outperform); expects 1Q international
contribution losses of $90m and segment to run at loss
through 2015