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Netflix’s Fee-Driven Revenue in Focus; More Banks Report

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October 14, 2015
Netflix earnings

Wall Street analysts are guessing that when Netflix (NFLX) reports earnings after the closing bell today, those numbers could be as rousing as much of the drama the Internet television service streams to its more than 65 million viewers.

Revenue is expected to surge relative to last year’s comparable quarter and some analysts believe that trend could continue. Their opinion was shaped as the originator of award-winning Orange Is the New Black and other programming barely stirred a fuss last week over upping its basic-service monthly cost another $1. New subscribers will be looking at a $9.99 monthly fee while current members will continue to pay $8.99 for another year before the rates climb. Two years ago, the monthly nut was $7.99.

“Always On”

Is that still a good deal? Its customers and traders of this stock will let us know. In a note to its clients after the hike was announced on Thursday, Stifel Financial Corp. mentioned that NFLX is making its way into the background noise of our lives by “increasingly becoming an always-on service.” Its price hike, Stifel said, comes “from a position of strength” as the brand picks up millions of new subscribers both domestically and internationally.

Considering the cost of growth, Wall Street has mostly focused on revenue gains versus profitability. For Q3, analysts reporting to Thomson Reuters are pegging a per-share profit of $0.08 on revenue of $1.75 billion, a 24% jump in revenue on a year-over-year basis. Netflix’s own forecast is at $0.07 a share.

Trading could be robust with the short-term options market pricing in the chance of a 13.5% move in either direction for shares around this release. That might explain why the implied volatility is so high at the 85th percentile, the top 15% of where it’s been all year. Options activity has picked up in the last couple of days on the 115 calls and the 105 puts that are expiring on Friday (see figure 1). Call options represent the right, but not the obligation, to buy the underlying security at a predetermined price and over a set period of time; the same applies to put options, which represent the right, but not the obligation, to sell the underlying security at a predetermined price over a set period of time.

Netflix-stock-chart

FIGURE 1: IMPROVED PERFORMANCE?

Netflix (NFLX) shares charted on the new-look thinkorswim® platform. Since hitting a 52-week trough in mid-December, NFLX stock has surged better than 42%. Data source: Standard & Poor’s. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

More from the Financial Space

We’ve got more bank earnings on tap for tomorrow ahead of the bell with Goldman Sachs (GS) and Citigroup (C), both due to report. JPMorgan Chase’s (JPM) results after the close Tuesday set the stage for what most big banks already have forecast, and analysts have projected: disappointing revenues. JPM reported revenue off 6.4% compared with last year. JPM blamed its results on “a challenging global environment and continued low rates.”

Wells Fargo (WFC) and Bank of America (BAC) results ahead of the bell Wednesday underscored that declining revenues trend as they both wrestled with low interest rates and choppiness on the trading desk. Still, both turned in profits that were above expectations.

Analysts expect more of the same from GS and C. At Thomson Reuters, analysts are looking for $4.41 a share in profit on revenue of $8.27 billion. That would fall below last year’s Q3 results of $4.57 a share on revenue of $8.39 billion, which greatly outpaced Wall Street expectations. GS stock is up only 1.6% from the same period a year ago.

The options market isn't looking for anything spectacular around the GS earnings release based on the rather tame 2% share move, in either direction, priced in based on short-term market measures. The implied volatility is trending in the bottom third percentile, though we’ve seen investor interest in the 190 calls and the 175 puts.

Also of note with GS earnings: the financial giant is releasing its own report via Twitter and its own website eschewing the traditional business wires that typically disseminate the information. The reason: too many hitches in recent months when sensitive corporate information was prematurely released.

Like other banks, analysts anticipate revenues from the trading desks to pull the topline number down. They are projecting per-share earnings of $1.29 on revenues of $18.8 billion. A year ago, C earnings were $1.07 on revenues of $19.6 billion.