The massive implied volatility has more or less been realized since shares started to tumble after their all time high of $300 in July 2011, but what has caused this surge in volatility and does NFLX’s outlook justify said price gap.
In short, it really does all come down to NFLX’s consolidated global performance. Here the company guided to a net loss of $13 million to a slight profit of $2 million. The proverbial bell that rang at the top, considering hindsight is 20-20, was when the company decided to raise its monthly fees to subscribers in mid 2011. Since then, paid subscribers (international/domestic streaming and DVD) have fallen off along with every other metric.
As with any business, watching cash is key to gain insight if one is successful or not. In the case of NFLX, the latter has been favored for the company has been losing cash. In Q3 total cash was down $32 million. The net income line for Q3 may be deceiving for FCF (free cash flow) was down $20 million. FCF being the amount of cash generated by the business after taking into account cash required to properly grow said business. According to NFLX, “significant uses of cash in the quarter (relative to net income) were cash payments for content (in excess of the P&L expense), cash payments for PP&E (including cache boxes for our Open Connect program), and reductions in miscellaneous accounts payable and accrued expenses.”
While NFLX may be a questionable investment, it is definitely a great trading vehicle. Weekly IV was at 180% before the event, and it got down to 90% today… a massive crush. The weekly options also have nice bid ask spreads, even out to the OTM strikes. Short interest is at about 29% and the analyst community has 7 buys, 22 holds, and 8 sells on NFLX. The average price target for NFLX is about $72 and next year the analysts are expecting $0.82 in EPS.
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Data courtesy of Thinkorswim
