Netflix Earnings Ahead, With Analysts Focused On Subscriber Numbers After Q2 Miss

Video streaming giant Netflix, Inc. NFLX reports third-quarter earnings after market close on Tuesday, Oct. 16. The last time the company reported, the stock had a massive move. The stock closed at $400.48 on July 16, NFLX reported after the close, and the stock opened the next morning at $346.95, although it gained a lot of ground to end the day at $379.48.

NFLX missed analyst estimates for subscriber figures, which many analysts pointed at as the primary culprit that sparked some panic selling. Total membership additions were 5.15 million in Q2 2018, missing management’s original forecast for 6.2 million. 

Both the U.S. and international segments exhibited slower membership growth than management had been expecting. In the company’s mature market, the U.S., total memberships increased by 670,000 in Q2 2018, compared to expectations for 1.2 million. The international market, where NFLX has been growing faster,  had an increase of 4.47 million memberships, below the 5 million management had been expecting. 

Growing competition, as well as a lack of major exclusive releases during the second quarter, were two of the factors widely cited by analysts as potential causes for the miss, while some thought pricing increases in some international markets weighed on growth as well. For the third quarter, management said it expects to add 5 million subscribers, 650,000 in the U.S. and 4.35 million in international markets. 

Earnings and Revenue Estimates

For Q3, NFLX is expected to report adjusted EPS of $0.68, up from $0.29 in the prior-year quarter, on revenue of $4 billion, according to third-party consensus analyst estimates. Revenue is projected to increase 33.9 percent year over year.

Other Topics

Analysts typically dig into the company’s average selling prices (ASP). In Q1 and Q2 of 2018, NFLX reported ASP increases of 12 percent and 14 percent, respectively. Increased ASP in recent quarters has been attributed to a combination of price hikes and greater mix of higher-priced plans that offer HD and 4K. 

And content spending is another topic that’s front and center around earnings. On a profit and loss basis, management said it plans to spend around $7.5 billion to $8 billion. NFLX has almost entirely financed its content spending with debt, something that has some analysts wondering whether or not it will be able to keep it up as interest rates tick higher. 

Netflix 2018 Rally. Even with some of the recent volatility and the company’s post-earnings drop the last time it reported, NFLX has still had a sizable rally this year. It started the year at $195.42 and is trading around $330 ahead of tomorrow’s report, almost a 64 percent year-to-date return still. Chart source: thinkorswim^® by TD Ameritrade. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

Netflix Options Activity

NFLX remains a ways from its all-time high of $423.21 it hit June 21, a few weeks prior to its second-quarter earnings release. Since the start of August, the stock has seen some support around the $310 to $315 level, while it faced resistance when it got back up to the $385 area. 

Around tomorrows earnings release, options traders have priced in about a 9 percent stock move in either direction, according to the Market Maker Move indicator on the thinkorswim^® platform. Implied volatility was on the high end as of this morning, at the 90th percentile. 

In short-term options trading at the Oct. 19 monthly expiration, calls have been active across a range of strikes, with heavier trading at the 340 and 360 strike prices. On the put side, trading has also been spread out across a range of strikes, with the greatest activity at the 340-strike put. 

Looking at the Nov. 16 monthly expiration, the 350-strike call has been more heavily traded, whereas volume has been lighter on the put side and primarily at the strikes right around the money. 

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.

Information from TDA is not intended to be investment advice or construed as a recommendation or endorsement of any particular investment or investment strategy, and is for illustrative purposes only. Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade.