Since starting in this business in 1997 I have seen a lot of strange things. Lots of stocks whose price action both up and down remain in your memory and make you want to tell trader war stories.
Netflix (NFLX) is one of those cult stocks with unbelievable up and down moves over the past few years and where we seem to increasingly hear the phrase “it’s different this time” to explain the stock’s 100% gains in 2015 alone. NFLX sales are expected to hit $6.8 billion in 2015, a ten fold increase from a decade ago when the company registered $688 million in sales that on average have been growing about 30% a year. In 2014 the company reported their largest annual net income of $341 million on $5.5 billion in sales. Far more impressive than Amazon’s (AMZN) $732 million on $89 billion in sales. But I think it is safe to assume that 30% sales growth from here on out will be a challenge despite the opportunities for overseas expansion.
The stock makes no sense to me and I suspect it makes little sense to most investors aside from some of the largest mutual fund complexes on the planet, and a few very savvy hedge funds. The top 10 holders of NFLX own about 52% of the shares outstanding on what is a fairly low float of about 60 million shares.
With 7% of the float short and such concentrated ownership, I think it is safe to say that the fix has been in.
Last night on CNBC’s Fast Money we discussed the merits of the stock’s bounce in anticipation of a stock split. I think regular readers know where I stand on this sort of stuff, it’s almost entirely nonsense but often becomes a self fulfilling prophecy. The assumption is when a cult stock is split, small investors are more able to pile in. So traders anticipate that by buying the stock before the split, pushing the stock higher and “proving” the theory. If investors want to invent excuses to buy a stock, then have a ball.
No doubt about, NFLX is a special stock at the moment. And a quick look at the stock over the last five years shows a special volatility. If you bought stock at the 2012 lows you would have been rewarded with 1100% gains. But you would have had to somehow manage to hold onto your stock through two 35% declines while you waited for an epic breakout in April above $500. Easier said than done:
But are NFLX investors willing to stomach that sort of volatility going forward? I am not trying to ring a bell, or sound an alarm here, and to be frank I have no skin in the game and my party line for the last couple hundred points has been to stay out of the way as the secular shift towards streaming media and cord cutting in the near term should be a positive for NFLX. But with sentiment so universally bullish, and the trade apparently so crowded, it wouldn’t take too much to cause a few of these large holders to head for the door at the same time, which I suspect could cause another one of those 35% declines, with 20% coming in one gap.
Short dated options prices recently just touched their lowest levels ever, with 30 day at the money implied volatility at 25%:
The company should report Q2 earnings in the third week of July, and aside from unexpected competitive announcements this event should be the next catalyst. Since going public in late 2004, the stock has averaged one day moves post earnings of about 13.5%. The July 24th weekly 650 straddle (the call and the put premium) with the stock about $650 is offered at about $85, or about 13% of the underlying stock price. If you thought the stock was poised for movement, owing that over the next 6 weeks would be a bit of a tough own as the implied move over the last couple quarters has been about 10%. For instance the day before Q1 earnings in April when the stock was about $490, the at the money straddle was about $50.
The split itself will likely mean a slightly less volatile stock intra-day and day to day as the liquidity will improve. But large percentage moves over time may become easier for a stock with a smaller digit price.