Netflix (NASDAQ:NFLX) with its market capitalization of $24.71B is an Internet television network with over 57 million members in nearly 50 countries enjoying more than two billion hours of TV shows and movies per month, including original series, documentaries and feature films. . Its members can watch as much as they want, anytime, anywhere, on nearly any Internet-connected screen. Members can play, pause and resume watching, all without commercials or commitments. Additionally, in the United States (U.S.), its members can receive digital versatile discs (DVDs) delivered quickly to their homes.
Shares of Netflix have traded with the most haphazard lack of pattern imaginable as the chart above shows. You will observe that the stock started 2014 with a $380 trading price, it fell to $299 in April 2014, only to rise to 480 in September 2014 and it is now changing hands at $409.49 per share. In addition, the stock sports a P/E ratio of 108.98 to confirm the perceived overvaluation in tech stocks.
Why We Are Looking At Netflix Today
However, options traders would find a great opportunity to record profits from the shares of Netflix today as the stock takes flight on the wing of impressive fourth quarter (Q4 2014) results. In fact, as at 10.26AM EST today, shares of Netflix have gained an impressive 17.17% to $408.68 as investors’ confidence in the stock returns.
Shares of Netflix are surging today because investors had expected the company to report another dismal quarter after the company’s subscriber growth number appeared to have reached a ceiling in October 2014. Highlights of the fourth quarter results are presented below:
Netflix reported revenue of $1.485 billion to beat the consensus estimate of $1.48 billion
Earnings came in at $1.35 per share to beat the consensus estimate of $0.45 per share
The company reported 2.43 million international net adds to beat the consensus estimate of 2 million subscribers and to beat the management’s guidance of 2.15 million
Domestic net adds was reported at 1.9 million to be the guidance by almost 4%
Takings from the Earnings Report
I am not overly impressed with the earnings beat because it is mostly related to a one-time tax benefit that might not necessarily resurface in the coming quarters. However, my key deduction from the earnings report is that Netflix is recording an impressive increase in its global popularity.
The fundamentals of Netflix’s business is based on the premise that an increase in user base will raise the contribution margin and additional users will reduce cost per user and increase revenue per user to drive profitability higher. Hence, it is easy to see why the stock is rising in response to the stellar fourth quarter results.
How to Trade NFLX Options
The impressive fourth quarter result has increased analyst optimism on the stock and we can expect this optimism to lead to increased buying action in the short to medium terms. Analysts at Evercore Partners raised their price target on Netflix from $430 to $450 per share. In addition, analysts at Goldman Sachs have raised their price target on Netflix from $410 to $460 and they maintained their “buy” recommendation on the stock.
I am optimistic about the prospects of Netflix in the short to medium terms and thus, I recommend buying NFLX call options. I am especially interested in the NFLX Jul 2015 450.000 call (NFLX150717C00450000) available at an asking price of $26.00.
— Daily Option Alerts