Netflix Pegged for Weaker Quarter, But Subscriber Outlook Matters More

Netflix, Inc. NFLX original programming, including “Orange is the New Black,” “House of Cards,” and a big hit this month, “How to Make a Murderer,” has changed the way that many industry analysts and investors look at the old mail-order company.

With content-focused on-demand streamers in mind, it is NFLX’s global subscriber number—perhaps more than Q4 top- and bottom-line results—that matter most to analysts in this earnings round, they’ve said. Why? Some analysts believe NFLX’s rapid subscriber-based growth rate is starting to slow.

Addictive Viewing?
Netflix reported U.S. subscriber additions of just 880,000 for Q3, well below its target of 1.15 million. NFLX said on its Q3 earnings conference call that it expected to end 2015 with more than 74 million subscribers. NFLX continues to put time and money into the original and purchased content it believes will keep the U.S. consumer coming back. But the company may be less U.S.-dependent moving forward. At the Consumer Electronics Show last month, NFLX CEO Reed Hastings said the company was launching in 130 countries at once, giving it a presence in every country on earth except China, according to financial media.

The Q4 earnings report hits after the market close today. Analysts reporting to Thomson Reuters are looking for a per-share profit of $0.02 on top-line sales of $1.83 billion. If realized, that expected earnings figure would be 63% below the same quarter a year earlier. Netflix has tended to beat Street expectations, doing so in eight of the past 10 quarters.

Its share activity has been part of the plot, too. NFLX is one of the so-called FANG stocks—Facebook Inc FB, Amazon.com Inc. AMZN, NFLX, and Google parent Alphabet Inc. GOOGL GOOG)—a group of tech stocks that has outperformed the rest of its comparable tech field in recent years and ranks among the most popularly traded stocks based on volume. Thanks to that recognition and subscriber growth, NFLX’s stock momentum propelled shares 135% in 2015 (figure 1). So far this year, the stock is down about 10%.

Stock Action
With an elevated implied volatility at the 80th percentile, short-term options traders have priced in a potential 11% share move in either direction around earnings, according to the TD Ameritrade thinkorswim® platform’s Market Maker Move indicator. A pick-up in call option buyers has emerged at the 105 and 110 strikes, while put option buyers appear focused on the 100 and 95 strikes.

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

As for GS, it may prove challenging for Wall Street to get a “clean” reading on banking performance. GS announced last week that it will fork over $5.1 billion to the Justice Department and other entities to settle mortgage-related claims. Those claims allege GS misled mortgage-bond investors about the quality of the assets that in part led to the 2008 financial crisis. The settlement will result in a $1.5 billion hit to earnings, GS said.

Already, industry analysts had been pulling down their GS earnings estimates for a few weeks. The latest consensus, according to Thomson Reuters, sits at $3.53 a share on revenue of $7.14 billion.

The quarter has gone relatively smoothly for the sector. Reporting early Tuesday, Bank of America Corp BAC said Q4 profit rose even during the tough trading conditions that jostled the broader sector. Profit of $0.28 per share topped the Thomson Reuters survey estimate for $0.26. Revenue rose to $19.53 billion from $18.73 billion a year ago. Analysts in the Thomson Reuters survey had expected $19.82 billion.

Morgan Stanley MS early Tuesday reported adjusted earnings of $0.43 per share, which topped the Street’s comparable estimate for $0.33 per share. Revenue of $7.7 billion was below $7.8 billion in the year-earlier period but above an expected $7.6 billion.

Last week, Citigroup C reported a jump in earnings as its legal fees fell relative to comparable quarters. Revenue rose 3%, to $18.46 billion from $17.9 billion a year ago, the company’s report revealed. Meanwhile, Wells Fargo & Co WFC topped Street expectations with a flat profit performance relative to a year earlier, but its $21.6 billion in revenue was below the Street’s expected $21.8 billion. Company comments pointed to the dent of falling oil prices on its commercial loans to the energy sector.

Market indicators flash some signs that interest in trading the banking earnings could continue. GS implied volatility sits at the lofty 80th percentile. Short-term options traders are pricing in a potential 5% move in the share price in either direction around earnings, according to the TD Ameritrade thinkorswim® platform’s Market Maker Move indicator. Though the volatility is elevated, specific options trading has been subdued.