Netflix Earnings Preview

Key Considerations
Netflix is undergoing significant changes, with Q4 being the last quarter it reports subscriber numbers. Moving forward, the focus will shift to revenue and operating margin, reflecting growth in advertising, live content, and games. The company is diversifying its content offerings with ventures into live content and sports, including NFL games and a high-profile boxing match. Despite initial technical challenges, these moves indicate potential for future growth.
Analysts are optimistic about Netflix's advertising business, which is expected to drive significant revenue growth. BMO Capital Markets recently raised its price target for Netflix to $1,000, citing growth in advertising and live programming.

Market Metrics
• Trading Volume: 40% above the 20-day average.
• Implied Volatility: ATM Implied volatility expiring 24 January is 79, and Implied 1-day share move following earnings is 8.4%.
• Stock Performance: Advanced 78% in the past 52 weeks.
• Recent Performance: Shares were up 2.4% in the past 5 days and fell 5.6% in the past 30 days.
• Valuation: Netflix trades at 43 times its estimated earnings per share.
• Short Interest: Equal to 2.6 days of average trading volume, with shares sold short amounting to 1.6% of float.
• Post earnings reaction: Shares rose after six out of 12 prior earnings announcements.

Fourth Quarter
The fourth quarter is expected to show solid growth in streaming paid memberships, with a net change of +9.18 million. The EMEA region leads the charge with an estimated +3.09 million new subscribers, followed by APAC at +2.73 million. Revenue is projected at $10.11 billion, with an EPS of $4.18, reflecting strong profitability. Operating income is estimated at $2.2 billion, with a healthy operating margin of 21.9%. Free cash flow is anticipated to be $1.06 billion, indicating robust cash generation.

First Quarter
Looking ahead to the first quarter, revenue is expected to climb to $10.48 billion, with an impressive EPS of $6.00. Operating income is projected at $3.12 billion, and the operating margin is set to improve significantly to 29.8%, showcasing operational efficiency and cost management.

FY guidance
For the full year, revenue is forecasted to grow by 12.2% to $43.59 billion. The operating margin is expected to be 28.3%, reflecting strong profitability. Free cash flow is projected at $8.8 billion, underscoring the company's ability to generate substantial cash flow and maintain financial flexibility.

Potential trade setup: Bull Put Spread (credit)
A bull put spread is designed to generate income while limiting risk. This strategy involves selling a put option at a higher strike price and buying another put option at a lower strike price within the same expiration date.

Example
• Sell Put: NFLX 01/24/25 P860 – close to last traded
• Strike Price: $860
• Option Price: $38.65
• Buy Put: NFLX 01/24/25 P820 – recent swing low
• Strike Price: $820
• Option Price: $20.64

Net Credit
• Premium Received (Sell Put): $38.65
• Premium Paid (Buy Put): $20.64
• Net Credit: $38.65 - $20.64 = $18.01

Maximum Profit
• Net Credit Received: $18.01 per share or annualised yield of 192%
• Total Profit: $18.01 * 100 = $1,801 (since each option contract represents 100 shares)

Maximum Loss
• Difference in Strike Prices: $860 - $820 = $40
• Maximum Loss: $40 - $18.01 (Net Credit) = $21.99 per share
• Total Loss: $21.99 * 100 = $2,199

Breakeven Point
• Strike Price of Sold Put - Net Credit: $860 - $18.01 = $841.99