Over the weekend, Barron’s made the case why Netflix Could Fall 40% or More as the Stock’s Sizzle Slows. Nothing particularly new here, valuation, slowing growth & competition are the main reasons why the stock “Could Fall 40% or More.”
As far as slowing growth this year, sales are expected to grow at their quickest pace since 2011, at nearly 30%, or approximately $8.7 billion,[caption id="attachment_64881" align="aligncenter" width="600"] From Bloomberg[/caption]
Earnings have been the obvious problem (on an adjusted basis they are non-existent), and the costs of growing overseas to offset maturing markets like the U.S. may prove to be a bit more of a challenge as their original content which has been so successful in customer acquisition may not resonate in overseas markets. I have no idea what Barron’s timetable is for the possibility of a 40% decline, but the February low at $80 is obvious near term support, while a re-tracement back to $70, to the April 2015 breakout that yielded 100% gains by year end would be a long term target. As my friend and co-panelist on CNBC’s Options Action, Carter Worth likes to say “draw the lines anyway you like, but to my eye…”.
Back to me. It appears the stock is at a bit of a technical inflection point. A break below the uptrend from the 2012 lows could put a re-test of the gap fill in play back towards $60:[caption id="attachment_64904" align="aligncenter" width="600"] From Bloomberg[/caption]
That said, with the normal universal skepticism of the stock for the reasons above, the high short interest (near 10%) and CEO Reed Hastings history of a being a maverick in how he deals with investors/analysts, who knows what he has up his sleeve in terms of guidance when the company reports Q2 results a week from tonight?
The options market is implying a 10% move in either direction, which is basically in line with the 4 qtr one day post earnings move, but shy of the 10 year average of about 13%.
Back to that inflection point business, the one year chart shows the stock materially below the levels of its Q1 report in mid April. The stock declined 13% the next day, and is in a well defined downtrend from the all time highs made last December. But again, with near term support very near the implied move in the mid $80s:[caption id="attachment_64906" align="aligncenter" width="600"] From Bloomberg[/caption]
NFLX as a company could also be very near an inflection point, which is highlighted by last week’s deal with Comcast, their long time nemesis for NFLX to be offered through some of their cable boxes. The situation reminds me a bit of the threat that Tivo a decade or more ago posed by the cable companies. They were slow to react to new recording technology, did not take the challenge seriously and merely defended their moat. It appears big cable, while slow to react to the streaming and over the top challenge by upstarts are not messing around anymore. In hindsight the TIVO challenge was nothing more than a call to action before larger game changers. The competition from the likes of HULU, AAPL, AMZN, HBO, and many more is coming, and I suspect we will see lots more partnerships and large scale M&A. The likelihood that NFLX goes the way of TIVO is very unlikely given their disruption in content, which is king. The lower the stock goes towards Barron’s 40% decline, the greater the likelihood of take-over chatter to re-emerge given its installed base, and first mover advantage. And there are no shortage of potential suitors, but only those who could absorb the near term earnings dilution like in the case of MSFT’s recent take-over bid for LNKD.
I am not saying this is going to happen anytime soon. But it probably does eventually. With a $41 billion market cap at the moment, it’s unlikely any large tech or media company would pay $50 to $60 billion for NFLX. But if the stock were to retrace a bit of the 2015 move (and the company’s plan seems as precarious as it has been since its lows in 2011), maybe we see a mega-deal similar to AOL/TimeWarner. Like AOL/TW is probably will make little financial sense and could even be a sign of a sentiment top.
Options prices are starting to climb into their 7/18 earnings.[caption id="attachment_64910" align="aligncenter" width="663"] 2 yr IV30 vs HV30 from LiveVol Pro[/caption]
July 22nd expiration is already about 80 implied vol, resulting in an almost 11 dollar at the money straddle. But the stock has settled into a slightly more consistent range around $100 for most of 2016 (compared to the wild rides from the few years prior. That could mean calendars for directional plays or outright premium sales might make sense if vol continues to rise into the event but in a stock like NFLX that carries gap risk obviously.
We will take a closer look prior to earnings at the trade set up.