Monday, October 13, 2014

* Netflix (NFLX) - Earnings Preview: An Unprecedented Risk Collapse; An Unprecedented Growth Expectation

Share on StockTwits

This visualization is provided by:
Capital Market Laboratories

NFLX is trading $444.10, down 1.8% with IV30™ up 12.7%. The Symbol Summary is included below.

Provided by Livevol

NFLX has earnings due out on 10-15-2014, after the market closes.  The implied volatility (risk as reflected by the option market) is lower for this earnings release than any prior in the last two-years.

In the short-term, the stock has been down 10% in the last month as the market has cooled off a bit. There are some fundamental measures that we will visualize which show some remarkably good trends in NFLX, but will be hyper-hyper focused on for earnings.  The market is ready to react to "bad news" just as it was so ready to react to "good news" a few quarters ago.

Here... We... Go...

I have written compulsively about NFLX in the past, and it has always surrounded risk pricing... namely, wrong risk pricing.

NFLX - The Volatility Phenomenon is Old, Is it Still Relevant? Any Why a Tweet Put Me in a Bad Mood... For No Good Reason.

NFLX - Earnings Preview: Never Been Seen Before: A Building Block of Humanity is Breaking Down

NFLX - All-time Highs & One of the Greatest Trading Opportunities Ever

How the Option Market is Totally Wrong; Proof that Market Volatility Has Lost Its Mind

NFLX - The Option Market is Dead Wrong... Again

NFLX - How the Option Market Totally Blew It... And We Knew it a Month Ago. Momentum Stocks are Deflating... Right Now.

NFLX - Unprecedented Low Risk?... How Many Times Will the Option Market Prove Wrong? And is it Right This Time?

NFLX - Earnings Preview: "Less Risk in This Firm Now than In the Last Two-Years." Do You Agree? I'm Not Sure I Do.

NFLX - The Giant Killer is a Giant, But the Option Market is Still Asleep. What Happens When it Wakes Up?

NFLX - This Newly Minted Giant Has a Big Secret; But It's in the Option Market...

NFLX - How a New Industry Giant Shows 'Cheap' (?) Volatility into Earnings; Did You Know This?

Netflix (NFLX) - The New Giant -- Stock Near All-time High but Volatility Collapses to Multi-year Low

NFLX - Is this the Most Powerful Firm in Entertainment? Some Things I Bet You Didn't Know... But Want to.

Netflix (NFLX) - Vol Nears Multi-Year Lows as Stock Explodes; Hollywood Take Note -- Another Shot Across Major Distributor’s Bows

The Charts Tab (two-years) is below (stock only).

Provided by Livevol

So.. for the last two-years NFLX is about 600%... Quoting Forrest Gump, "that's all I have to say about that."

In the last year, NFLX is up about 35%... and in the last month NFLX is down about 10%.

Let's talk risk... The IV30™ chart in isolation, below.

Provided by Livevol

The implied volatility is the forward looking risk in the equity price as reflected by the option market (IV30™ looks forward exactly 30 calendar days).

In English, the red curve is the risk in future stock price movement. The blue "E" icons represent earnings releases.  We can see a rather obvious and sharp decline in the risk of each subsequent earnings report.  There's a sort of calm surrounding NFLX this time around, unlike a few years ago when the risk of obsolescence was in fact... ya know... a risk...

I have written compulsively about NFLX in the past, and it has always surrounded risk pricing... namely, what happened to be too low risk pricing.  We may be there again, but this time, I think the time horizon may be longer than just an earnings release.  More on that in a sec...

First, here's what to look for in earnings.

Revenue (TTM)
Yep, the top line is in play, and always will be when a firm is trading 132x earnings.  The trend is gorgeous, the expectations are for more gorgeous "things."

Net Income (TTM)
Earnings have been booming of late after that spasm down a few years ago.  Obviously, analysts will be looking at the bottom line, but how do we get to the bottom line?...

Gross Margin %
NFLX is undertaking a rather large project in Europe which is expected to lose money for several years.  that will affect margins (and earnings), but the margins will be broken into region and / or project (I assume). The recent pop in gross margin % is not trivial and is very much in play right now for earnings.

Operating Revenue / Operating Expenses
This number has to be above 1 for a firm to be profitable.  We can see the trend is up, and gross margin % is a part of it.  This number too, will be very much in play when earnings come out.

Price to Sales
Scary... that's all... The market is pricing in growth at an accelerating level.

The Bottom Line: Earnings from Continuing Operations %
Now that's a chart.  This is the margin that will likely be most in focus.  NFLX U.S. business has to boom to make the EU business look like a good idea.  This is another margin we must watch.

And finally... the explicit risk risk pricing...

Finally, the Options Tab is included below.

Provided by Livevol

Using the at-the-money (ATM) straddle we can see that the option market reflects a price range of [$414, $476] by the end of trading on October 17th.

But, check out November options.  That range is [$395, $495] by the end of trading on November 21st.  That one has my attention.

  • If you believe the stock will be outside that range on expiry or any date before then, then you think the volatility is too low.
  • If you believe that range is too wide, and that the stock will definitively be in that range on expiration, then you think volatility is too high.
  • If you're not sure, and can make an argument for either case, then you think volatility is priced just about right.

This is trade analysis, not a recommendation.

Legal Stuff:
Options involve risk. Prior to buying or selling an option, an investor must receive a copy of Characteristics and Risks of Standardized Options. Investors need a broker to trade options, and must meet suitability requirements.

The information contained on this site is provided for general informational purposes, as a convenience to the readers. The materials are not a substitute for obtaining professional advice from a qualified person, firm or corporation. Consult the appropriate professional advisor for more complete and current information. I am not engaged in rendering any legal or professional services by placing these general informational materials on this website.

I specifically disclaim any liability, whether based in contract, tort, strict liability or otherwise, for any direct, indirect, incidental, consequential, or special damages arising out of or in any way connected with access to or use of the site, even if I have been advised of the possibility of such damages, including liability in connection with mistakes or omissions in, or delays in transmission of, information to or from the user, interruptions in telecommunications connections to the site or viruses.

I make no representations or warranties about the accuracy or completeness of the information contained on this website. Any links provided to other server sites are offered as a matter of convenience and in no way are meant to imply that I endorse, sponsor, promote or am affiliated with the owners of or participants in those sites, or endorse any information contained on those sites, unless expressly stated.

1 comment:

  1. The market is unpredictable, so as the companies….. What should we expect from this industry?