To The Moon

$Netflix (NFLX) $is the first to annouce Q1 earnings in big techs , which would become a battleground for bulls and bears.

Earnings Preview

The market's consensus expectation for Q1 is a 4% YoY revenue growth to $8.18 billion, in line with the company's guidance; diluted EPS of $2.86, slightly higher than the company's guidance of $2.82.

It seems that the market is more optimistic about the company's profit margin, as efficiency has been emphasized throughout the entire tech industry, including layoffs and business reductions. Since COVID-19, Netflix has also paid great attention to each show's input-output ratio, especially when expanding into overseas markets where low-cost spending is prioritized and reducing content expenses can reduce amortization items. More importantly, after expanding its higher-profit-margin advertising business, the overall profit margin of the company will be significantly improved.

In terms of subscription users, it is expected that there will be an additional 2.41 million subscribers in Q1; North America region expects an increase of 258k while Asia-Pacific region is expected to be a major contributor with an estimated increase of 1.027 million.

This data has also been slightly raised within this past month which indicates analysts are more optimistic about user growth in Q1 compared to last year when there was a decrease by 200k subscribers causing panic selling among investors leading to Netflix’s sharp decline but indirectly promoting later development in advertising business.

I believe there are two reasons why analysts are optimistic about new subscriber additions:

First, New basic accounts with ads included - Netflix can simultaneously charge subscription fees as well as advertising fees like Hulu does which could improve revenue per individual user over time.

ENG Update to Sharing Chart Image

Second, sharing accounts. Q1 Netflix began to offer a shared account service with an extra monthly payment of 7.99(local currency) for standard or advanced program members in countries including Canada, New Zealand, Portugal and Spain. This will increase the overall number of subscribers of Netflix to a certain extent.

Earnings Focus

In the past, the most core data of Netflix's financial report was new subscription users. However, with the addition of advertising business, investors' sensitivity to this data has decreased somewhat. To assess its ability to sustain growth in performance, it is necessary not only to look at subscription users but also at how high the average revenue per user (ARPU) can be.

So, the increase in advertising business is very important. Although this data is not currently displayed in the financial report (it may not be classified separately in revenue until it has gained a sufficient proportion of subscription revenue), investors can observe the growth of advertising business by continuously monitoring changes in profit margins (especially gross profit margins).

In addition, AI is not irrelevant to Netflix.In fact, AI applications of images and videos are also beginning to take shape. In Netflix's massive dramas and movies, using AI technology to insert related advertisements and carry out accurate analysis and delivery can not only improve advertisers' delivery efficiency, but also further increase Netflix's advertisement increment.

Therefore, investors also need to observe the explanations of corresponding businesses by executives at the performance meeting.

Trading on Earnings

Netflix's share price seems to have made a roller coaster since the last financial report. Although the overall performance since the beginning of the year (+12.8%) is better than that of the S&P 500 (+8.6%), its volatility is greater. This also makes its options more expensive.

Netflix's trend since April is worse than that of the broader market, because it really does not have the aura of AI, lacks the attribute of "technology hedging", and has lower trading volume among head technology companies. But bears are not active either.There are fewer open short positions than before the previous financial report.

NFLX SHORT VOL

This also provides a better opportunity for earnings trading.

The preferred strategy is a Straddle or wide Straddle strategy for "big volatility"

The monthly option due on April 21st happens to be the option due in the week of NFLX financial report. Choose the trans-contract with the closest closing price of $332.72 on April 17, that is Buy Call and Put at an same exercise price of $332.5.

The cost of the transaction is $2,980, and the breakeven at maturity is $362.30 and $302.70.

In other words, the market expects Netflix's financial report to rise or fall by 10% this week.

Of course, if you think the price change will be less than 10%, you can reverse a wave of "reverse straddle strategy", that is, Sell Call and Put at an exercise price of $332.5.As long as the maturity fluctuation is less than 10%, it can be profitable.

If you are particularly optimistic about Netflix's financial report, use the Bull Spread strategy to gain profits.

The expected increase is about 10%, that is, you can buy a low-priced CALL, such as a CALL with an exercise price of $315, and sell a CALL with an exercise price of $360 at the same time.

The cost is $1,959, the maximum profit is $2,541 (NFLX stock price exceeds $360 due), the maximum loss is $1,959 (NFLX stock price is less than $315 due), and the break-even point is $334.

As the market is relatively more optimistic about Netflix Q1 performance,This will lead to a greater risk of avoidance in the downside than in the upside.Therefore, if you like to do reverse trading (small probability and big income), you can focus on short positions and related options.

In addition, Netflix's financial report can also be an opportunity to open or increase positions.

Use the high IV before the financial report, sell the put option, and choose the position you think is appropriate. For example, choose the exercise price of Sell PUT of US $310, which expires on April 21st, and the premium is US $5.6. If it falls below $310, it is equivalent to opening a position at a price of less than $305.

Happy Trading!