Netflix earnings reports are usually pretty exciting. It’s just like binge watching a season and the episodes leading up to the season finale are all nerve wracking. Then the season finale sends shock waves through your couch and you realize why so many people have been hooked on the show. Is Netflix one of the “Walking Dead”?
There are certainly many opinions on this stock. It has had an incredible run this past year after some pretty tumultuous times. Recently there has been a US court action which may have consequences for Netflix. Namely the Net Neutrality Rules. In a nutshell think of Netflix as a passenger bus on the information super highway that is the internet. The court action leaves open the possibility that internet service providers (ISPs) can build a toll on the highway and charge Netflix traffic more since it is a vehicle with more than two axles like on highway toll. Netflix profit margins can be hurt because they can either absorb the cost or try to pass it on to the consumer most likely stunting their consumer growth.
The positive spin to Netflix is that despite competition from the Hulu, Amazon, Redbox and anyone else who has access to streaming content is that they have a well regarded user interface, an attractive price point, and name brand recognition. One day Netflix can go the way of the Blackberry, however it will take more time since at USD $10 a month, many people will keep the service going concurrently with whatever replaces it until the consumer decides to cancel their subscription. Netflix has also produced it’s own programming successfully keeping some consumers addicted to their product.
The market will most likely pay attention to the subscriber growth rates and growth outside of the US where Netflix made a large investment. At some point these growth rates will cool down as Netflix will look more and more like a utility just like a cable provider, or phone company. Then the profit margins will probably determine the action. For now let’s look at the numbers:
Assuming Netflix is trading at $328.70:
In the past 3 years Netflix has seen moves as high as $115.80 and as low as -$141.10. With the stock trading in the 3 handle range ($300-$400) these moves may seem somewhat exaggerated. An average move in either direction would be about $60.40. Yes the post earnings price action has been that crazy. There is a long term “support or lack of” level of $300 that seems ripe for being tested. As well as a potential “resistance or spring board” level of around $380 that is lurking out there. Also of note is that Netflix has not been able to reclaim a shorter term support level around the $350 level. In a normal week you would expect Netflix to stay between $306.50 and $350.60. The options markets have “priced in” a $33.65 move. The largest positions are on the $300 and $350 strikes for the puts and calls respectively. This seems lower than usual when compared to recent history. Perhaps we will see some fireworks when the report is released.
Good luck and trade rationally