(Note: The author of this fundamental analysis is a financial writer and portfolio manager. He and his clients own shares of NFLX and GOOGL.)
Netflix Inc.'s (NFLX) stock has plunged into a bear market, 24% off its mid-July highs. But now some options traders are betting the stock rebounds in the coming weeks by 10% from its current price of $315. Technical analysis also suggests the stock is breaking out, supporting the bullish views.
The stock's recent weakness comes despite delivering better-than-expected quarterly results. The shares of the streaming media company have slumped along with its "FAANG" peers amid a broader technology-led stock market sell-off, which has seen the Nasdaq drop by 8% from its highs.
Looking For A Rebound
The call options set to expire on December 21 at the $335 strike price have increased by more than five times to 3,100 contracts since October 22. With the calls trading at roughly $12.50 per contract, a buyer of the calls would need the stock to rise to approximately $347.50, or 10%, from the current stock price.
A Break Out
The chart shows that the stock is breaking out as well, after rising above technical resistance at $312. It suggests that the stock may rebound to roughly $333, an increase of 6% from the shares' current price. The relative strength index is now starting to trend higher despite the stock price reaching new lows, a bullish divergence. It suggests that bullish momentum may be returning to the stock.
The steep decline in the stock comes despite the company posting earnings that were 32% higher than estimates, while revenue came in roughly inline. Despite the strong results, analysts have cut their profit forecasts for the fourth quarter by 51% to $0.24 per share. Meanwhile, full-year earnings estimates for 2018 have dropped by just 1%.
The company did post better-than-expected subscriber growth in the quarter and provided strong fourth quarter subscriber guidance. But it had little effect on lifting the stock, as the stock market was hit a by a wave of increasing levels of volatility. It would seem that at least some traders are betting Netflix leads a broader stock market recovery.
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.