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Does Netflix Have Game and Will Google Earnings Score?

July 15, 2015
earnings preview JJ Kinahan NFLX GS GOOGL

Trading and commentary ahead of Wednesday’s after-the-bell earnings report from Netflix is proving to be rocky with implied volatility on fire.

Netflix has been on a wild ride this week as investors and commentators talked about earnings expectations and forecasts, its 7-for-1 stock split on Wednesday, and even the merits of the third season of “House of Cards.” There are unusual trades of both puts and calls at seven times what’s considered normal. The implied volatility is in the 71st percentile—which measures volatility levels for the last 52 weeks, well outpacing its historical volatility of 18%.

On heavy volume, the streaming-video firm, which has enjoyed an impressive stock rise even when the chips were down this year, saw its share price gain a solid 3%, hitting an all-time intraday high of $716.16 on Monday. It settled down and was trading in the $703 range until the split.

Greenlight Capital hedge-fund founder David Einhorn upbraided the firm Monday, warning investors not to get caught up in the rhetoric from the company when the earnings are released. He questioned the stock’s soaring price advance after the disappointing first-quarter earnings.

“If you’d told us the news in advance, we’d have guessed it was going to be a bad day for NFLX holders, but apparently Red Ink is the New Black,” he wrote in a note to his clients. He’s also not a fan of the popular “House of Cards” original series, describing the third season as something “scripted to compete with Ambien.”

On Tuesday, the Wall Street Journal reported that Netflix shares have fallen each day after second-quarter results were announced—no matter how they were—over the last six years, plunging as much as 25% and as little as 4.6%. Given the split, shares already have dropped from the $700 range to the $100 range. Even so, they’re already some 100%-plus higher year to date.

But given all the interest in the split and its earnings, we’re looking at an 8% move on the stock following two consecutive quarterly earnings reports when the stock jumped 18% higher.

For what it’s worth, ThomsonReuters has analysts expecting an average per-share income of 31 cents, notably below the 38 cents a share reported in the first quarter, on revenues of $1.65 billion.

Also on the after-the-bell docket is Intel, which always gives us some good insight into the technology industry. The stock’s off year-to-date lows, and we’re seeing some buyers of the weekly July 31 calls. The options are pricing in just under a 4.5% move on the stock.

Analysts are forecasting income of 51 cents a share on revenues for $13.11 billion. Slowing sales of PCs, which big research groups now blame on the strong dollar as well as global economic weakness, a phasing out of Windows XP refresh or upgrade cycle, and the Windows 10 launch, will hurt the top and bottom lines of chip leader Intel. Those headwinds come as the firm rejiggers its business model from a PC base to a mobile base. But the worldwide downward trajectory that PC sales have charted as consumers load up on tablets and mobile devices, not to mention the open-ended disruption from cloud computing, is a potential harbinger of more bad news ahead.

Looking ahead to Thursday, banking conglomerates Goldman Sachs and Citigroup will fill us in on results before the bell, but most coverage will be focused on Google’s results once the markets close.

Goldman Sachs, still the premier trading environment on Wall Street, is projected to return $3.90 a share on revenues of $8.81 billion. That’s well below the first-quarter earnings of $5.94 a share, thanks in part to declining fixed-income revenues – expected to drop some 15% -- but moreover because the last quarter was a whopping 40% upside surprise. Still, while other multinational firms moan about currency issues, banks like Goldman usually benefit in currency craziness. Investments, which represent 25% of revenues, could be strong unless they’re harnessed by some tie to China.

Investors have been optimistic as Goldman Sachs is just off their year-to-date trading highs. As well, we’re seeing options trading activity at four times their normal amount of puts and calls.

Analysts anticipate that Citigroup will turn in $19.15 billion in revenue for $1.35 a share in earnings, which comes off good results in the first quarter. But one reporting period does not make a trend. Three, however, do, and there were three straight quarters of missed expectations ahead of this year’s first quarter. Thursday’s results will paint a clearer picture for the firm with a strong presence in credit cards and consumer banking at a time when consumers just aren’t spending that much money, as retail sales numbers show.

The stock is off its year-to-date highs, and we’ve seen a lot of buyers over the last few weeks in the July 57.5 calls.

As for Google, analysts are all over the board on stock recommendations, ranging from hold to outperform ratings while the stock is trading just off its year-to-date highs, moving higher by more than 8% just since July 9. We’re expecting a 3.25% move on the shares from the earnings. Trading volume is two times the norm.

The results will certainly lend some clarity as to the company’s operations, but analysts are also anxious to hear from the search engine’s new chief financial officer.

Ruth Porat joined the behemoth in May from Morgan Stanley and is said to be on a rampant reorganization and reallocation of the freewheeling spending that has defined the Google workplace for years. If not told outright, analysts are likely to ask what her plans are for the $65 billion treasure chest of cash that the firm has been hoarding. The burning question: Will she give some back to shareholders in the form of a dividend? Amid such speculation, Google shares are already up better than 7% this week.

ThomsonReuters pegs revenues to surge 11% year-over-year to $17.75 billion with earnings of $6.69 a share, higher by 10%. We might find out, however, that competition is getting tougher for the 500 lb. gorilla as fragmentation creates more new segmented search engines. 

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