MorningWord 10/18/16: Netflix Streaming

by Dan October 18, 2016 9:32 am • FREE ACCESS

Shares of Netflix are up 17% as I write after releasing Q2 results showing far better than expected streaming subscriber additions. They also guided Q4 higher. This comes after two consecutive quarters of worse than expected subscriber adds that had investors selling the stock to the tune of 13% each time. To state the obvious, these are massive one day moves for a company that had a $43 billion market capitalization on last night’s close (now $50 billion!).

On last night’s conference call NFLX Founder/CEO Reed Hastings said a couple things that I thought were worth further reflection. First, (paraphrasing) that investors (evidenced by the stock’s post market pop) are starting to understand the long term plan for the company. Once again he remarked on the post earnings volatility in the stock, but this time in a good way…

There is little doubt that there are some investors who are in it for the long haul. The top 6 holders are some of the largest mutual funds in the world, who collectively own nearly 40% of the shares outstanding, and as of their latest filings have been net buyers, per Bloomberg:


On the flip-side, short interest was high heading into the print, near 8% of the float, causing a little battle between those with a long and short term views for the company.  For the better part of the last year, hedge funds were correct to sell rallies. Something might have changed technically though this Summer, with the stock filling in the July earnings gaps in a matter of weeks, breaking above the downtrend that had been in place from the all time highs in early December and despite under-performing many high growth peers, and the broad market in 2016, the stock had repeatedly tested technical resistance at the nice round number of $100:

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

Which brings me back to the post earnings volatility in the stock that Hastings alluded to last night. Since 2006, the average one day post earnings move has been about 13%. There are few stocks if any, in the S&P 500 (SPX) that have had that sort of post earnings volatility over the same period.  Is it the shareholder base? Partially, but remember that half the shares outstanding are held by the sorts who do not sell quarter by quarter. Long – Short hedge funds are clearly the short interest, who are into taking directional bets into events, and drawn to stocks like NFLX like moths to a flame. But a good chunk of blame has to be placed on NFLX management’s forecasting of their own business. They kind of suck at it. Or, they are merely bad at communicating with investors quarter to quarter. They clearly have a credibility problem with a decent contingency of shareholders who don’t take a multi-year view.

I don’t take a multi-year view, which has made a stock like this nearly impossible to consider as an investment. For one, due to valuation. But on the other hand I don’t find the volatility attractive for a long term investment. There is little rhyme or reason to it. The stock has traded in a 40% range in the last year. And it’s either left for the very nimble who could sell rallies and buy back on dips (nearly impossible), or those who can Netflix and Chill.

The other way is to define risk into the events through the use of options. But even that is difficult when a stock so routinely can double its implied move.

Oh and one last thing. While long term investors think there are certain attributes to the stock that remind them of (AMZN), the main thing I think they have in mind is that the stock moves way too much for a mature company. And I suspect the NFLX story will have a different path than AMZN to a $100 billion in sales and $385 billion market cap. While AMZN was willing to sacrifice profits for revenue growth and entrance to new markets like AWS with higher margins then their core, NFLX (as Bloomberg noted this morning) is holding a massive cash bonfire in pursuit of global expansion as domestic sub growth has ground to a halt:


But, maybe just maybe someone buys NFLX at the wrong price to better compete with AMZN. From my earnings preview: