Media streaming leader Netflix ( NFLX ) will announce its second-quarter numbers on July 18. Netflix will report its quarterly results after the market close, with analysts forecasting a modest $0.02 per share in earnings, down from $0.06 during the same period last year. NFLX shares are down 14.5% on the year.
NFLX was recently trading at $97.85, down $35.42 from its 12-month high and $17.90 above its 12-month low. Overall technical indicators for NFLX are bearish, and the stock is in a weak upwards trend. The stock has recent support above $93.15, and recent resistance below $98.70. Of the 27 analysts who cover the stock, 14 rate it a “strong buy”, two rate it a “buy”, eight rate it a “hold”, one rates it a “sell”, and two rate it a “strong sell”. The stock receives S&P Capital IQ’s 4 STARS “Buy” ranking.
After solid gains in 2015, NFLX has been weak in the current year, a result of concerns over the company’s rapid international expansion. In January, the company surprised the market by announcing an expansion into 130 new countries. While the long-term impact of the rapid expansion could be huge, the costs of building a presence in these new countries will weigh on earnings in the near-term. As such, the stock has been trending lower since the announcement. The good news for investors is that the concerns have already been priced into the stock, but shares still trade with a very high P/E of 338. International subscriber growth will be key to the direction the stock moves post-earnings, as will domestic subscriber numbers. Netflix is already very established in the U.S. market, so extra attention will be placed on how well the international expansion is going. In the long-term, expanding will be a good thing for the company, but it will take some time to have an impact, and Wall Street, up to this point, does not appear willing to show patience. Even with shares down 14.5% on the year, shares remain priced for perfection, and could extend its losses if the quarterly results fail to impress. The consensus calls for earnings of $0.02 per share, but the Street is more upbeat, placing a whisper number of $0.04 on the quarterly results, which indicates a high likelihood of a better than expected report. Earnings are likely to outpace the consensus, but the quarterly earnings need to be around $0.04, and international subscriber growth needs to be strong for shares to trend higher.
Stock Only Trade
If you’re looking to establish a long stock position in NFLX, consider buying the stock under $97.50. Sell if it falls below $87.75 or take profits if it gets to $112.00.
If you want a bullish hedged trade on the stock, consider a September 70/75 bull-put credit spread for a 30-cent credit. That’s a potential 6.4% return (37.0% annualized*) and the stock would have to fall 23.0% to cause a problem.
If you are looking for a bearish hedged option trade on NFLX, consider a September 120/125 bear-call credit spread for a 40-cent credit. That’s a potential 8.7% return (50.4% annualized*) and the stock would have to climb 23.0% to cause a problem.
Covered Call Trade
To purchase the stock with a lower cost basis, consider a September $95.00 covered call. Buy NFLX shares (typically 100 shares, scale as appropriate), while selling the September $95.00 call for a debit of $89.60 per share. The trade has a target assigned return of 6.0%, and a target annualized return of 35.1% (for comparison purposes only).
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Originally published on InvestorsObserver.com