Netflix (NFLX) reports Q1 results Wednesday after the close. The options market is implying about a 10% one day move which is shy of the 12.5% average over the last 4 qtrs, and below the 13.7% average over its 11 year history as a publicly traded company.
The stock is up 6% today on an upgrade at UBS from Neutral to Buy (read Barron’s rundown of the note here). While this may be the impetus for the move, I think it is safe to say that the set up into the earnings print is becoming increasingly treacherous for traders as the stock approaches the prior intra-day all time high of about $490 made last September:
The volatility in the stock over the last year, trading as low as $300, and as high of almost $500 shows just how controversial the story is. Bears point to valuation, costs of original content and an onslaught of impending competition in the streaming tv space, while bulls clearly see a unique property with first mover advantage and an amazing long runway as they expand outside the U.S.
I am fairly mixed on story, valuation is confusing, especially for a nearly $30 billion market cap company that trades 150x expected 2015 earnings, but at a fairly reasonable 4.3x expected 2015 sales. In the near term the hype around content competitors like HBO towards online streaming, and companies like Apple supposedly in talks to offer a new platform to cord cutters, could actually benefit NFLX given their established brand and offering. (NFLX seems to be in the middle of all of it so far.)
I would add though that investors tend to get a tad worried about the stock when it has a market cap between $25 and $30 billion. The chart below since Jan 1, 2014 shows the stock’s propensity to sell off above $450, there have been four total selloffs from that area, two of about 35%, and two of about 14%:
My crystal ball is in the shop, and I have no idea what they are gonna print. I suspect given the stock’s nearly 20% rally since the lows on April 6th that the implied move of 10% for earnings should not be hard to come by. If they were to disappoint in a meaningful way I suspect the stock is back at $425 very quickly, while a beat and raise could cause a breakout of epic proportions.
A quick look at the stock’s performance following the last 11 quarter is kind of interesting (circled in yellow crayon). The one day moves following results in the prior 10 quarters has moved the same way for 2 consecutive quarters consistently over the last two and half years. There is obviously nothing scientific here, but it could be a reflection of some sort of seasonal or cyclical nature of their subscriber trends that investors haven’t been accounting for:
If you wanted to play what may be trend (or may just be random noise), the stock should rally Thursday. Or maybe the rally into earnings was investors realizing this trend and trying to get ahead of it. (Trading is fun!)
If the stock is going up, it is going through $500, and there will be no overhead resistance. But vol is pretty high. We’re going to look at some trade ideas and will update before the print.