(Note: The author of this fundamental analysis is a financial writer and portfolio manager. He and his clients own shares of NFLX.)
Netflix Inc. (NFLX) stock seems to be on an unstoppable upward trajectory, rising 10-fold in five years and up 53% so far in 2018, having fully recovered – and more – from its recent pullback. Now, some options traders see the stock price rising to nearly $416 by expiration in January 2019. That's a rise of almost 42 percent from its current price of roughly $292.
The optimism comes as investors continue to focus on the company's ability to drive revenue growth and expand its footprint into markets beyond the U.S. That international growth is expected to fuel revenue higher to nearly $23.5 billion by 2020 – nearly double the $11.69 billion the company had in 2017.
The Case For $416
The options bets in Netflix for expiration on January 18, 2019 (which is 11 months away) are overwhelmingly bullish. In fact, the $300 calls have almost 6,000 contracts of open interest, outnumbering the puts by nearly 30 to 1.
With the options trading at $45 per contract, the dollar value of the open contracts is a stunning $27 million. That's a huge wager, give the time until expiration and the implied volatility at nearly 42 percent. By comparison, the S&P 500 has an implied volatility of only 14.6 percent.
Time value and intrinsic value are the two key components in options pricing, so the more time until expiration, the more expensive the time value portion is. The higher the implied volatility reading, the more expensive the intrinsic value. In this case, both are incredibly high. (See also: What's the Difference between Intrinsic Value and Market Value?)
Despite the expensive options pricing, there are some traders wagering that Netflix stock will soar 42 percent, to $416 a share, by January. With a contract value on the calls of $16, the dollar amount being wagered approaches $4 million. The increase to $416 is merely for the options to break even, which means they would have to rise above $416 to be profitable!
What seems most impressive about these wagers are they were placed before the latest news that Reed Hastings, the CEO of Netflix, expects India to be the next 100 million subscriber market. A Netflix subscription currently costs between $7.80 and $12.30 in India according to an article in the Hollywood Reporter.
Meanwhile, total subscribers are presently estimated at only 500,000, and could reach 2.5 million by 2020. This means current revenue estimates for Netflix over the course of the next several years will need to be adjusted higher.
The bullishness is being reflected in the stock, with Netflix shares reaching all-time highs on a technical break out, rising above its old highs around $287. (See also: Top 3 Netflix Shareholders.)
All of this positive sentiment suggests Netflix stock may still have much further to rise in 2018.
Michael Kramer is the Founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdings. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.