Netflix Pre-earnings Analysis (NFLX)
Chart done on hourly timeframe. Netflix lost its membership to the fancy acronym world this year as investors moved away from the FAANG stocks to the Magnificent 7 stocks. While most stocks from the acronym remained favorites under the Magnificent 7, Netflix was one that got removed from the “top contenders” in the market. The change in sentiment likely came from the fact that Netflix’s revenue trends dropped from double digit percentage growth prior to 2022, to just 6% growth in 2022 and 2023. Although the company did boost subscribers after their password crackdown, the move was seen as a desperate move by its investors, reflecting weakness in organic growth. Despite their weakness in revenue, the company is still trading near its all time highs, largely because they’ve managed to boost profitability in recent quarters. Netflix grew its net income by a solid 20% in 2023, posting their best numbers in years. The company has also growth in balance sheet to a respectable 50B in assets compared to 29B in liabilities, and free cash flow has steadily grown to about 7B.
Although Netflix is in a different industry than stocks like Meta and Apple, it usually still falls into the same innovative category that came up during global adaptation to new technology. However Netflix has fallen behind in a very key element, which is growing their cash reserves. Meta and other previous FAANG companies have nearly all introduced a dividend to keep investors happy, but Netflix’s production costs have just been too high to allow the company to build enough cash to start paying a dividend. Typically, growth companies that slow down in year over year growth starting paying dividends to satisfy their investors, such as Meta did in recent history, but that’s not looking like the case for Netflix yet, which means that this quarter, they’ll need to announce a pathway to cost cutting. Netflix not only needs to satisfy the hefty global subscriber growth projections, they need to boost their profit margins so their long term outlook looks more rosy.
Option chain analysis:
There’s absolutely no way of telling how a company will react to earnings. Sometimes the company meets all their expectations, but their leaders end up saying something on the call that triggers a sell-off, or vice versa. There are ways to predict how large the post earnings move may be though, and according to the options market, we see that traders expect Netflix to move as much as $72 between now and August 16th, the direction of that move depends on the earnings outcome.