Given a few questions that we have received (as well as the amazing options pricing), we wanted to do a quick preview of NFLX earnings before the report this evening.
Event: NFLX reports their fiscal Q3 earnings tomorrow night after the close. The options market is implying about a 13.5% one day move, which is actually quite a bit lower than the 4 qtr avg of about 26% and the 8 qtr avg of ~22.5%.
Sentiment: Wall Street analysts remain mixed on the stock despite the fact that it has more than quadrupled in the past nine months. They have 11 buy, 18 hold, and 8 sell ratings on the stock. Meanwhile, short interest is at a 5 year low, though still at around 13% of float (just low relative to NFLX’s own history):[caption id="attachment_28373" align="alignnone" width="639"] 5 year chart of short interest in NFLX, Courtesy of Bloomberg[/caption]
Options Open Interest: Call to put open interest is about evenly split for NFLX. 20 day average activity has also been about evenly split, with a call to put ratio of 1.10 in the past month.
Price Action / Technicals: Perhaps the most interesting aspect of NFLX price action in 2013 has been that the bulk of the move higher has been on and immediately after its 2 strong earnings reports this year. Here is the 1 year chart showing the 2 huge gaps:[caption id="attachment_28374" align="alignnone" width="635"] 1 year daily chart of NFLX, Courtesy of Bloomberg[/caption]
After the April earnings gap, the stock never breached the 200 level to the downside, and made a new local high last week after breaking above the 250 area. On the upside, the long-term level to watch is the all-time high from July 2011 around 305:[caption id="attachment_28375" align="alignnone" width="635"] 5 year weekly chart of NFLX, Courtesy of Bloomberg[/caption]
Fundamentals/Expectations: Analysts are expecting 0.40 per share in earnings for this quarter and $1.07 billion in revenue. But NFLX has not been an earnings story – it has been a “platform” story. In other words, the most crucial aspect of today’s report is its subscriber number growth. Given the stock’s run, net domestic subscriber adds probably need to be close to 1 million new adds to sustain the momentum. International sub numbers are also key. Finally, strong guidance has been a major factor on the past 2 earnings gaps, so that will also play a role.
Volatility: Implied vol (red) is high in NFLX on an absolute basis, but it’s actually lower than it has been prior to the past 4 earnings reports:[caption id="attachment_28376" align="alignnone" width="648"] 1 year chart of 30 day implied volatility (red) vs. 30 day realized volatility (blue) in NFLX, Courtesy of LiveVolPro[/caption]
Meanwhile, realized volatility has remained relatively subdued outside of the huge earnings gaps (as the 1 year chart in NFLX showed in the technicals section). The 13% implied move is much lower than the 22.5% average over the last 8 quarters, so options traders are not expecting another huge move from this gappy name.