Netflix, Inc. Exhibiting Overbought Conditions Ahead Of Q2 Earnings On Monday

| About: Netflix, Inc. (NFLX)

By Brendan Gilmartin, VP Research and Content

Netflix (NASDAQ:NFLX) is scheduled to report Q2 2013 earnings after the close of trading on Monday, July 22, at approximately 4:05 p.m. ET, with a conference call slated to follow at 6:00 p.m. Netflix shares have been rallying sharply since the Q1 earnings release back in April, rising more than 60% on renewed growth prospects and increased subscription revenues.

Outliers and Strategy

Netflix is expected to post EPS of $0.40 for the Q2 period. The range is $0.30 to $0.56 (source: Yahoo Finance). Back in April, Netflix said it was targeting Q1 EPS in the range of $0.23 to $0.48. Revenues are seen rising 20.6% to $1.07 billion (source: Yahoo Finance).

Keep an eye on guidance for the upcoming Q2 2013 period. Estimates are as follows:

  • Earnings Per Share: $0.45 (high estimate is $0.61)
  • Revenues: $1.10 billion (high estimate is $1.13 billion)

Following the recent run-up in Netflix shares, there are widespread concerns in the sell-side community that Netflix shares are highly overvalued. Note that short interest is back up in the 17% area -- an indication of increased bearishness. The options market is currently pricing in a 14.3% move off of earnings. In just the past four quarters, the average price change is 25%.

Recent News

  • July 17: Speaking from CNBC's "Delivering Alpha" conference, renowned investor Carl Icahn stated that he was still long Netflix.
  • July 16: Boutique firm Battle Road Research reiterated a Sell rating on Netflix and indicated it believes the shares are worth closer to $102, according to a post on Barron's online. Several factors contribute to the cautious outlook, including weaker gross margins, questions regarding its contribution margins, losses in international streaming, and declining free cash flow.
  • July 15: Bernstein maintained an Underperform rating on Netflix with a price target of $180, according to The firm believes the Street is underestimating competitive threats from the likes of Google (NASDAQ:GOOG) and (NASDAQ:AMZN).
  • July 12: According to a post on, Barclay's raised its price target on Netflix from $220 to $250. The firm cited increased traffic trends and quality of original content, along with penetration in connected TVs and mobile devices.

Technical Review

Netflix shares are up more 60% since the April earnings release, touching a recent peak of $270.31 (as of July 18) -- not far from the all-time high established in May 2011 ($270.80). Against this backdrop, the bar is set pretty high heading into Monday's earnings. Should results come in meaningfully above consensus, there is little in the way of near-term resistance. Conversely, there is initial support in the $250 area, followed by the psychologically important $200 level. Note that the relative strength index (RSI) is well above the 70 level, signifying an overbought scenario and leaving Netflix vulnerable to steep downside risk.

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Netflix shares have been rallying over the past several months, benefiting from new content licensing agreements, expansion on social media platforms, and a more dominant market position -- resulting in increased subscriber additions and more flexibility on pricing. The fundamental improvements have resulted in a dramatic increase in sell-side sentiment.

However, the valuation side of the equation seems to have many concerned that the recent run-up was too much, too fast, with shares trading at rich premium to earnings and revenues on a relative historical basis. Against this backdrop, Netflix shares are vulnerable to even the slightest missteps. Conversely, another blowout quarter could easily push the shares well above the all-time high near $270.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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