Option Trade 
Netflix, Inc. (NASDAQ:NFLX) Calls
Thursday, October 12, 2017

** OPTION TRADE: Buy the NFLX OCT 20 2017 200.000 CALL at approximately $6.00. Place a pre-determined sell at $12.00.

Also include a protective stop loss of $2.40.

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 slated to report its third-quarter earnings results after the closing bell on Monday, October 16.

The latest Consensus Estimate is calling for earnings of $0.32 per share this quarter. This result would represent growth of about 165% from the $0.12 posted in the prior-year quarter. NFLX‘s consensus estimates have improved by 10 cents over the past 90 days.

That would be roughly a 167% increase compared with the same quarter a year ago and up more than 113% from the most recent second quarter.

Revenue is expected to be $2.97 billion for the quarter, according to analysts. That would be a nearly 30% improvement compared with the same quarter last year and an increase of almost 7% compared with the most recent quarter. Analysts’ revenue expectations break down to $1.55 billion from domestic streaming, $1.31 from streaming overseas and $110 million from its domestic DVD subscriptions.

Netflix is expected to report net domestic streaming additions of 779k and net international streaming additions of 3.67 million. This would total about 4.45 million net adds, which is below the 5.2 million adds reported in the most recent quarter.

Consensus estimates are also calling for Netflix to hit 52.70 million domestic streaming subscribers and 55.70 million international subscribers. That would bring the platform to 108.40 million total streaming subscribers, up 4.3% quarter-over-quarter and 25% year-over-year.

It is expected that Netflix will report international streaming revenues of $1.307 billion, which would represent growth of 53.25% from the $853 million seen in the year-ago period. More importantly, contribution profit from this unit is expected to hit $31.8 million-a significant improvement from the $69 million loss witnessed last year.

The stock is now up nearly 60% year-to-date and carrying plenty of momentum into its report; and the technicals show shares could still have considerable upside in the final stretch of the year.

Netflix’s 50 day moving average is $179.65 and its 200-day moving average is $164.37. The stock has a market cap of $84.11 billion, a PE ratio of 237.00 and a beta of 1.09. Netflix, Inc. has a 1-year low of $97.63 and a 1-year high of $199.40.

Influencing Factors

Netflix Inc. recently announced that it is starting its first regional production in the Middle East. It features popular Lebanese comedian and actor of Nadine Labaki's Caramel and Ziad Doueiri's The Insult fame, Adel Karam. The yet-to-be-named stand-up comedy show is expected to release globally sometime next year.

The streaming giant also announced a documentary based on the history of renowned football club from Italy "Juventus FC" in a bid to establish itself as "a sport entertainment brand". Reportedly, the series will have four episodes spanning an hour each and is set to release early next year.

It is believed that these efforts will help to sustain the share price momentum of the company. The stock has gained 57.6% year to date, significantly outperforming the industry's 12.5% rally.

Netflix's strengthening international original content portfolio has been the key growth driver in recent times. Apart from North America, the company has been doing really well in Latin America and Europe. Netflix is doing considerably well in India and Japan as well and has a lot of room for expansion in other Asian markets. The company's move into the Middle East region shows its desire to expand further in the region.

The company's expanding original content portfolio and improving penetration in international markets were the key catalysts behind its strong performance last year. Notably, rapid international expansion has paid off for Netflix, with the company adding substantially more subscribers than what it expected over the last quarter.

Reportedly, 4.14 million new subscribers were added overseas in the last quarter. International Streaming revenues (41.8% of total revenue) soared 53.7% year over year to $1.165 billion driven by an increase in paid members in the last reported quarter. The company expects to have added 3.65 million subscribers in the international segment in third-quarter 2017 ended Sep 30.

Netflix caught substantial attention last week when it announced it is raising prices from $9.99 a month to $10.99 a month for its standard service, and from $11.99 to $13.99 a month for its premium service. Wall Street liked the update -- NFLX ended the week hovering just below all-time highs.

That price hike boils down to one fact that Wall Street seems to get: Netflix's value-add for consumers far exceeds the current monthly price of the subscription. And that fact gives Netflix meaningful pricing power right now.

Also, it helps fuel the company’s commitment to produce and own as many high-quality movies and TV shows as monetarily possible.

Netflix’s goal has been to produce its own content and own it outright, rather than license it from networks and studios. If Netflix owns all the rights to the content on its platform, it can make more money off of it.

The proof is in the price action.

Netflix stock on Wednesday received price-target increases from two Wall Street firms that are optimistic the internet television network can extend its lead in the streaming video market.

Investment bank Morgan Stanley increased its price target on Netflix stock to 225 from 210 and maintained its overweight rating.

Morgan Stanley analyst Benjamin Swinburne said he believes Netflix's scale will give it advantages in subscription pricing and access to content.

He also thinks subscriber cancellations from Netflix's recent price increases will be "more modest" than after previous rate hikes. One reason is its stronger lineup of original shows and movies including "Stranger Things," "Marvel's The Punisher," "The Crown" and "Bright," Swinburne said in a report.

Also, brokerage firm Cowen reiterated its outperform rating on Netflix and upped its price target to 215 from 197.

Cowen analyst John Blackledge sees a rosy outlook for Netflix subscriber additions worldwide over the next 10 years.

Blackledge extended his forecast period for Netflix by five years until 2028. He now predicts that total Netflix subscribers will rise to 302 million worldwide by 2028, up from 116 million this year.

"We now estimate Netflix's U.S. and international subscribers (will) rise from 55.4 million and 60.3 million (respectively) in 2017 to 88 million and 214 million in 2028, with ARPU (average revenue per user) rising about 5% annually on average globally," Blackledge said in a report.

He is predicting a steep ramp up in profit margins and earnings per share over his forecast period. He sees Netflix earnings rising from $1.33 a share in 2017 to $3.11 in 2018 and about $29 in 2028.

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

  • Buckingham Research reiterated their buy rating on shares of Netflix in a report issued on Monday. They currently have a $214.00 price target on the Internet television network’s stock.
  • Netflix had its price objective raised by Loop Capital from $212.00 to $228.00 in a report released on Monday morning. Loop Capital currently has a buy rating on the Internet television network’s stock.

Several institutional investors have recently made changes to their positions in the stock, to name a few….

  • M&R Capital Management Inc. boosted its holdings in Netflix by 42.9% during the second quarter. The fund owned 3,000 shares of the Internet television network’s stock after buying an additional 900 shares during the period. M&R Capital Management Inc.’s holdings in Netflix were worth $514,000 at the end of the most recent reporting period.
  • Quadrant Capital Group LLC increased its stake in shares of Netflix by 0.6% during the second quarter. Quadrant Capital Group LLC now owns 1,684 shares of the Internet television network’s stock worth $229,000 after buying an additional 10 shares during the period.
  • Guardian Life Insurance Co. of America increased its stake in shares of Netflix by 0.7% during the first quarter. Guardian Life Insurance Co. of America now owns 1,655 shares of the Internet television network’s stock worth $245,000 after buying an additional 11 shares during the period.
  • M Holdings Securities Inc. increased its stake in shares of Netflix by 0.5% during the first quarter. M Holdings Securities Inc. now owns 2,467 shares of the Internet television network’s stock worth $365,000 after buying an additional 12 shares during the period.

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 OCT 20 2017 200.000 CALL at approximately $6.00. Place a pre-determined sell at $12.00.

Also include a protective stop loss of $2.40.

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