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Netflix Earnings Preview: Streaming Giant Hiked Prices in October

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October 16, 2017
TV on a stand up against a white wall
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Netflix (NFLX) reports third-quarter earnings after market close on Monday, October 16. So far this year, shares have been on quite a run and the stock hit a new all-time high on Friday, October 13.

The stock surged after releasing its second-quarter results, which showed the company had added more subscribers than analysts were expecting—subscriber growth is typically one of the primary focuses among analysts for Netflix. In the second quarter, NFLX reported global net subscriber additions of 5.2 million, versus forecasts of 3.2 million.

Historically, the second and third quarters have been the slowest for subscriber growth, which management has attributed to seasonal trends and the timing of content launches. For the third quarter, NFLX issued guidance that it expects net additions of 750,000 subscribers in the U.S. and 3.65 million internationally.

To grow its subscriber base, NFLX has said it primarily focused on content creation and partnerships to increase brand awareness in new markets. In the second quarter, NFLX announced a partnership with Altice/SFR France, which will offer the service bundled with its high speed internet and TV services. Management acknowledged they’ll likely expand this approach as NFLX focuses on international expansion.   

Turning to content creation, the company has said it plans to spend about $6 billion on new programming and create 1,000 hours of original programming in 2017. To put that in perspective, NFLX spent an estimated $2.4 billion on content in 2013. Management has said it expects its content investments to continue to grow as it expands internationally and it creates more non-English original content for original markets.

Creating original content hasn’t always worked out for the company and it has cancelled shows that didn’t generate the viewership it hoped for. One example of a show that NFLX cancelled is The Get Down, which reportedly cost over $120 million to produce. The cancellations can seem abrupt to fans, but in the last quarter NFLX said “as much as we dislike ending a series early, it consoles us that it frees up investment for another new show, or two.”

As its content expenditures have grown, management has said its target is an operating margin of 7%. Throughout the first half of the year, the company reported a 7.1% operating margin. After the company recently hiked the price of some of its services, analysts will likely be asking about the expected impact on operating margin and subscriber growth on today’s earnings call. 

Stock chart showing three month performance of Netflix and the company's social sentiment

FIGURE 1: NEW HIGHS FOR NETFLIX.

After reporting better-than-expected subscriber additions in the second quarter, Netflix’s (NFLX) stock gapped up from the low $160 level to close above $180. The stock just hit a new all-time high of $200.82 in intraday trading on Friday, October 13 and closed at $199.49. The bottom chart shows the company’s Social Sentiment, which allows TD Ameritrade clients to view the number of social mentions (positive, negative, neutral) for a company and its brands, as well as the overall percentage of positive sentiment for the company. Chart source: thinkorswim® by TD Ameritrade.  Data source: Standard & Poor’s. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

Netflix Earnings and Options Trading Activity

For the third quarter, Netflix is expected to report earnings of $0.32 per share, up from $0.12 in the prior-year period, on revenue of $2.97 billion, according to third-party consensus analyst estimates. Revenue is projected to increase 29.8% year-over-year from the $2.29 billion generated in the same quarter last year.   

Options traders have priced in about a 7.2% potential share price move in either direction around NFLX’s upcoming earnings release, according to the Market Maker Move indicator on the thinkorswim® platform.

In short-term trading at the October 20 monthly expiration, calls have been active at the 200 and 205 strike prices, with a decent amount of activity at the 210 strike as well. Puts have been active at the 190 and 195 strikes. As of this morning, the implied volatility is at the 54th percentile. 

Note: Call options represent the right, but not the obligation, to buy the underlying security at a predetermined price over a set period of time. Put options represent the right, but not the obligation to sell the underlying security at a predetermined price over a set period of time.

Looking Ahead

We’re getting into the full swing of earnings season. Tomorrow morning, banking giants Morgan Stanley (MS) and Goldman Sachs (GS) report earnings. Later in the week, we’ll see results from General Electric (GE) and Procter & Gamble (PG) before the bell on Friday, October 20. If you have time, make sure to check out today’s market update to see what else is happening. 

Good Trading,
JJ
@TDAJJKinahan

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