Option Trade
Netflix, Inc. (NASDAQ:NFLX) Calls
Monday, July 17, 2017

** OPTION TRADE: Buy the NFLX AUG 18 2017 170.000 CALL at approximately $4.50. Place a pre-determined sell at $9.00.

Note: No protective stop losses added -- but if you wish to do so make it $1.80.

Also Note: This is a recommendation and individual members can use their own discretion as to when to enter or exit!

by Ian Harvey   

Video-entertainment veteran Netflix, Inc. (NASDAQ:NFLX), a provider of Internet television network, a former market darling, is scheduled to release earnings after Monday's close. The stock just hit a record high of $166.87/share in June 2017 and is currently trading near $161/share. The stock is prone to big moves after reporting earnings and can easily gap up if the numbers are strong.

Netflix is expected to report $0.16/share, up from $0.09 during the same period last year, on $2.76 billion in revenue. Meanwhile, the so-called Whisper number is $0.18.

Overall technical indicators for NFLX are bullish, and the stock is in a strong upward trend. The stock has recent support above $145.50, and recent resistance below $166.90.

Wall Street remains very bullish on Netflix as the company continues to grow its international market share. The stock has trended steadily higher over the last year, and is currently trading just shy of its all-time high. Analysts forecast the company will report 0.6 million new domestic subscribers, and 2.6 million new international subscribers for the recent quarter. Netflix has enjoyed strength from its strong lineup of original content that has helped the company not only retain current subscribers, but attract new ones as well. The company has posted better than expected earnings each of the last six quarters, and Wall Street expects another earnings beat for the most recent quarter.

The stock is up 24.5% year to date.

Netflix stock’s 50 day moving average is $157.80 and its 200-day moving average is $144.87. The company has a market cap of $69.44 billion, a PE ratio of 208.43 and a beta of 0.98. Netflix has a 12-month low of $84.50 and a 12-month high of $166.87.

Influencing Factors to Consider

The latest forecast calls for membership gains to soar to 3.2 million from 1.7 million a year ago as operating margin rises by a full percentage point to 4.4% of sales. This quarter's subscriber figures will benefit from the fact that the House of Cards premier was shifted to the second quarter of 2017 from the first quarter of the prior year. This substantial uptick in subscribers is also driven by popular original dramas and content assets now valued at more than $11 billion.

This is a business that's steadily expanding its sales base while improving profitability. Over the first two quarters of the year, Netflix should add 8.2 million members for a slight decrease from the 8.4 million it gained over the same period in 2016. Netflix went on to add 19 million users in total last year to mark a healthy acceleration over 2016's growth. Operating profit margin is on pace to rise to 7% for the full 2017, compared to 4% last year.

Netflix expanded its video streaming services almost worldwide in 2016. This year, the company has committed to a more ambitious slate of original content productions, and it's found a back door into the missing puzzle piece that is China by partnering with a local hero.

As Netflix prepares for a second-quarter earnings report on Monday night, it has gained more than 50% over the past 52 weeks and trades just below the all-time highs that were set in early June.

According to an analysis by Cowen & Co. analyst John Blackledge, Netflix premiered 129 hours of original content in the second quarter of 2016 but 300 hours in the same period of 2017. This new material includes the aforementioned season of House of Cards, fresh seasons of Orange Is the New Black and Master of None, and all-new titles Okja, War Machine, and Anne With an E. If rising content production volume is any indication of subscriber growth, Netflix should come through with strong addition numbers this time.

Wall Street analysts project that the Los Gatos-based company added 631,000 net subscribers in the U.S. during the quarter, per FactSet. That’s compared to just 162,000 new subscribers at the same time one year ago.

J.P. Morgan analyst Doug Anmuth believes the company will call special attention to the performance of “13 Reasons” on Monday, according to Barron’s. Anmuth dubbed the past few months “perhaps Netflix’s strongest content quarter ever” in a recent note to clients.

As a result of its efforts, Netflix just scored 92 nominations in the 2017 Emmy Awards race. That’s a record for the company — it came in second only to HBO.

The net value of content assets on Netflix hit $11 billion as of March 2017, according to a new study out from Morgan Stanley analysts and cited in Variety.

MKM Partners analyst Rob Sanderson remains bullish going into Netflix’s 2Q 2017 earnings report. He’s expecting the report to reflect a slightly better than seasonal quarter. He said in a note to investors dated July 10 that the company’s content line-up was strong during a quarter that tends to be the weakest in terms of seasonality.

Sanderson feels that original content has been driving subscriber growth for the company, especially overseas. This year Netflix expects to boost the number of original programming hours by 65% to 70%, and management has said that the slate of original content will greatly improve in the second half of the year compared to the first half.

The analyst believes Netflix could surprise to the upside for the third quarter. He sees the third-quarter outlook as the most important part of Netflix’s 2Q 2017 earnings report, as it tends to be a much greater contributor to the company’s full-year subscriber numbers.

Analysts and Hedge Funds Opinions

Top analyst Michael Graham at Canaccord is angling for stellar original content to strengthen the video streaming giant’s domestic subscriber’s base. Even with subscriber net add forecasts “meaningfully” ahead of consensus, the analyst has every confidence for the giant to achieve his high targets thanks to a particularly “strong Q2 slate.”

Ahead of the print, the analyst reiterates a Buy rating on shares of NFLX with a $175 price target, which represents a 10% increase from where the stock is currently trading.

When it comes to not just a strengthening of growth, but also growth that is “sustainable,” Graham points to “expanded localization efforts increasing international penetration, and long-term building blocks being put in place (like set-top box integration and local content investments)” as roots of Netflix’s success.

Graham’s bullish stance rests in escalating subscriber momentum, with the analyst concluding, “Overall, we believe that subscribers will come in closer to our numbers and beat guidance, with any positive comments on ‘global margins’ adding to the positivity.”

Also, BidaskClub upgraded shares of Netflix, Inc. from a hold rating to a buy rating in a report issued on Sunday morning.

Several other analysts have also recently commented on the company…..

  • Canaccord Genuity lifted their target price on shares of Netflix from $165.00 to $175.00 and gave the stock a “buy” rating in a research note on Friday, June 16th.
  • UBS AG reiterated a buy rating and issued a $175.00 target price on shares of Netflix in a report on Wednesday, April 19th.
  •  Cowen and Company reiterated a buy rating and issued a $170.00 target price on shares of Netflix in a report on Friday.
  • MKM Partners reiterated a buy rating and issued a $195.00 target price on shares of Netflix in a report on Monday, July 10th.
  • Cantor Fitzgerald reiterated an overweight rating and issued a $190.00 target price on shares of Netflix in a report on Thursday.
  • Bank of America Corporation reaffirmed a “buy” rating and set a $184.00 price objective (up previously from $154.00) on shares of Netflix in a research note on Tuesday, April 18th.
  • Morgan Stanley reiterated an “overweight” rating and set a $185.00 target price (up from $175.00) on shares of Netflix in a research report on Thursday.
  • Finally, FBR & Co reiterated a market perform rating and issued a $145.00 target price on shares of Netflix in a report on Friday.

Two equities research analysts have rated the stock with a sell rating, fifteen have given a hold rating and thirty have assigned a buy rating to the company’s stock. Netflix presently has an average rating of Buy and a consensus price target of $165.53.

Several institutional investors have recently made changes to their positions in the stock…..

  • State Street Corp boosted its position in Netflix, Inc. by 2.7% during the first quarter, according to its most recent disclosure with the Securities and Exchange Commission. The fund owned 17,535,737 shares of the Internet television network’s stock after buying an additional 463,143 shares during the period. State Street Corp owned approximately 4.07% of Netflix worth $2,591,946,000 as of its most recent filing with the SEC.
  • Vanguard Group Inc. increased its position in Netflix by 3.5% in the first quarter. Vanguard Group Inc. now owns 27,161,082 shares of the Internet television network’s stock worth $4,014,680,000 after buying an additional 921,283 shares during the period.
  • Tybourne Capital Management HK Ltd. increased its position in Netflix by 34.3% in the first quarter. Tybourne Capital Management HK Ltd. now owns 2,316,195 shares of the Internet television network’s stock worth $342,357,000 after buying an additional 590,966 shares during the period.
  • Finally, Morgan Stanley increased its position in Netflix by 22.9% in the first quarter. Morgan Stanley now owns 3,061,631 shares of the Internet television network’s stock worth $452,541,000 after buying an additional 571,126 shares during the period. 82.76% of the stock is currently owned by institutional investors and hedge funds.

Harvey’s Options Volatility Indicator


Therefore, based on the facts above, and Harvey’s Options Volatility Indicator, the following option trade is recommended…..

** OPTION TRADE: Buy the NFLX AUG 18 2017 170.000 CALL at approximately $4.50. Place a pre-determined sell at $9.00.

Note: No protective stop losses added -- but if you wish to do so make it $1.80.


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