Following an earnings report that saw the stock explode 27% higher in five days, shares of Netflix, Inc. (NASDAQ:) finally slowed down yesterday. With NFLX stock now approaching some major resistance at the $129 level, I look for Netflix to pullback and consolidate over the coming weeks.
The impetus behind the huge rally was the impressive subscriber growth numbers, especially internationally, in the latest earnings report. Netflix added 3.2 million international subscribers, handily blowing past analysts’ expectations of roughly 2 million. U.S. growth also beat at 370,000, albeit at a much lower rate. Overall, Netflix is fast approaching 100 million users worldwide.
While these growth numbers are indeed impressive, future growth rates will be necessarily lower simply due to the law of large numbers. Without a Chinese presence, it will be very difficult for NFLX to maintain anything close to these torrid growth rates.
A deeper drill down within the earnings report showed that revenues just barely edged out estimates, coming in at $2.29 billion compared to $2.28 billion estimates. Earnings per share was 12 cents versus 6 cents estimates, which highlights the ever present valuation questions.
Cash burn continues unabated, especially with the company’s focus on original content. Netflix also just announced a, $800 million debt offering, which adds further leverage to the balance sheet.
Click to Enlarge The Netflix stock chart is definitely looking a little toppy here. NFLX stock once again failed to break out past the key $129 level, which has proven to be major resistance in the past,
Netflix stock is also getting extremely overbought, with a 14 day RSI reading approaching 80. Previous instances of such overbought conditions proved to be significant tops in NFLX stock.
The price action yesterday was also emblematic of a stock that may be due for a pullback. NFLX shares traded up to resistance at $129.29, only to reverse course and close slightly lower on the day.
This doji formation many times is a reliable trend reversal indicator, especially following a rally of the magnitude just seen in NFLX stock. The buyers may have become exhausted and the sellers assumed control.
Click to Enlarge Also interesting to note that $129.29 was the exact high from Aug. 5, 2015, which also marked a major top in NFLX stock.
With implied volatility (IV) at comparatively low levels, option prices are relatively cheap. This favors option buying strategies, so a simple long put diagonal is the preferred way to position.
NFLX Stock Trade Idea
Buy to open NFLX November $125 puts and sell the NFLX Oct 28 $124 puts for a $2.90 net debit.
The maximum loss is $290 per spread. The spread is 14 deltas net short at trade inception. Ideally, NFLX stock closes near the $124 strike price this Friday to realize the maximum gain. .
As of this writing, Tim Biggam did not hold a position in any of the aforementioned securities. Anyone interested in finding out more about option-based strategies or for a free trial of the Delta Desk Research Report can email Tim at firstname.lastname@example.org.