(Note: The author of this fundamental analysis is a financial writer and portfolio manager. He and his clients own shares of NFLX.)
Netflix Inc.’s (NFLX) stock has risen by more than 10 times over the past five years as subscriber growth for its streaming media service has grown at an explosive pace. Shares have stalled out since the end of June, but options traders are betting shares of the stock aren't finished rising and could increase by another 10% following quarterly results. The company is expected to report results after the close of trading on Monday, July 16.
Analysts are looking for the company to post a monster second-quarter, with earnings expected to climb by over five times to $0.80 versus last year. Meanwhile, analysts see revenue climbing by over 41% to $3.94 billion. (For more, see also: The Biggest Threats to Netflix.)
The long straddle options strategy set to expire on July 2, just four days after the company posts its results, is implying that shares of Netflix rise or fall by 10% from the $420 strike price, placing the stock in a trading range between $380 and $460. That is because the cost to buy one put and one call cost about $40. But the number of options betting shares will rise at that strike price heavily outweighs the bets the shares will fall by a ratio of 6 to 1, with roughly 4,200 open call contracts to approximately 700 open put contracts. Should the stock rise, as the number of bullish calls indicate a buyer of the options strategy would need the stock to rise by more than 10% to break even. (For more, see also: Is a Netflix Debt Bubble Coming?)
The short-term trading chart also suggests that the stock may rise. The 15-minute trading chart shows that the stock is nearing a potential break out and should the stock rise above a technical resistance level at $419, the stock would once again be on the rise. The chart shows a bullish technical pattern too, known as a rising triangle, also suggesting the stock may be about to break out.
Analysts aren't looking for only strong second-quarter results as the full-year look is just as strong. Earnings are expected to more than double, while revenue is forecast to climb by 38%. The outlook for 2019 shows that robust growth is expected to continue, with earnings seen rising nearly 65% on revenue growth of 25%.
With lofty expectations being priced into the stock, the company will have to do more than meet estimates. It will take a big beat, and strong guidance, to keep shares rising. Anything less may result in a shock, sending shares sharply lower.
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.