Netflix Q1 earnings preview – subscribing to volatility

Netflix is one of the preeminent trading stocks - where we often see big movement, a high propensity to trend and sizeable intraday high-low daily ranges that can appeal to the day traders. 

With Q124 earnings due on Thursday and the possibility of another sizeable price catalyst, Netflix is a stock that should be on the radar. 

Netflix is already something of a market darling, where the share price has significantly outperformed the S&P500 by 19.6 percentage points over the last 3 months and by some 51.7 percentage points over six months.

Going into this earnings release, with price having recently traded to a multi-year high of $639, we now see consolidation with price tracking a range of $639 to $600, and importantly holding above the 50-day MA ($601.12), which has been a solid trend filter since October.

We can see the Bollinger Bands tightening up into Q1 earnings as price moves remain contained to the 20-day MA, and traders refrain from taking risks until the facts are known. A daily close above/below the bands and/or the recent trading range could be meaningful and could suggest a higher probability that we see a trend develop, which could be a compelling hunting ground for more momentum-styled traders. 

Earnings Pedigree

Netflix does have a strong pedigree at earnings, having beaten consensus expectations in 7 of the past 8 quarterly earnings reports. Many will also recall the Q423 earnings report where NFLX added 13.1m paid streaming subscribers, a number well above expectations and subsequently, the shares rallied strongly.

(Source: Bloomberg)

NFLX has a history of pronounced movement on earnings, with double-digit percentage moves in the prior 2 reporting quarters (on the day of earnings) and taking the period out the absolute move has averaged -/+ 12.8%. Being able to capture that movement in the post-market session is important for traders, and despite a potentially fast-moving market, there should be ample liquidity. 

By way of expectations of price movement for this earnings report, we can look at the options market and asses the implied move on the day of earnings, which now currently stands at -/+ 8.1%.

This level of implied volatility speaks to the view that we could easily see movement in the share price once the earnings and guidance are known and could offer opportunity, but it is also a risk that those with existing positions may need to manage.  

What to watch this time around?

For CFD traders going through the finer details of cash flow, subscribers’ numbers and sales growth seems a tough proposition. This is why most will let the market tell them how they feel about the shape of the business, and dynamically react to the ensuing price action. 

However, by way of a kicker, the likely overriding driver will be quarterly subscriber adds and any guidance for Q224 subscribers. The consensus (from investment bank analysts) is for 4.77m net subscriber adds in Q1, with 3.7m pencilled in Q2. The view on the street is this is a low-ball call – which won’t surprise given NFLX have beaten consensus expectations for sub growth for three quarters in a row - and investors are positioned for a number closer to 7m, even 8m. 

On headline Q1 earnings estimates, the consensus we view is for:

Earnings per share (EPS) - $4.54 (Q224 estimates $4.55)

Revenue - $9.264b (Q224 estimates $9.50b)

Free cash flow - $1.89b (Q224 estimates $1.50b)

There will be a focus on the crackdown on password sharing and how that is impacting earnings, competition, ad-supported tier, and commentary on unique programming. 

The consensus 12-month price target for NFLX is $626, so I question if there is scope for a solid earnings re-rating, which could see these targets revised higher. That said, price targets are largely irrelevant for traders, and price will react far quicker than any analyst can change their models. The market will let us know about the earnings and the operating environment and the price could see some outsized moves – one to put on the radar.