Can Netflix's Programming Success Spread To Its Bottom Line?

| About: Netflix, Inc. (NFLX)

Summary

Netflix reported U.S. subscriber additions of just 880,000 for Q3, well below its target of 1.15 million.

With an elevated implied volatility at the 80th percentile, short-term options traders have priced in a potential 11% share move in either direction around earnings.

Investment bank Goldman Sachs is also on tap to release earnings ahead of the market bell on Wednesday.

netflix Netflix (NASDAQ:NFLX) original programming, including "Orange is the New Black," "House of Cards," and a big hit this month, "How to Make a Murderer," has changed the way that many industry analysts and investors look at the old mail-order company.

With content-focused on-demand streamers in mind, it is NFLX's global subscriber number-perhaps more than Q4 top- and bottom-line results-that matter most to analysts in this earnings round, they've said. Why? Some analysts believe NFLX's rapid subscriber-based growth rate is starting to slow.

Addictive Viewing?

Netflix reported U.S. subscriber additions of just 880,000 for Q3, well below its target of 1.15 million. NFLX said on its Q3 earnings conference call that it expected to end 2015 with more than 74 million subscribers. NFLX continues to put time and money into the original and purchased content it believes will keep the U.S. consumer coming back. But the company may be less U.S.-dependent moving forward. At the Consumer Electronics Show last month, NFLX CEO Reed Hastings said the company was launching in 130 countries at once, giving it a presence in every country on earth except China, according to financial media.

The Q4 earnings report hits after the market close today. Analysts reporting to Thomson Reuters are looking for a per-share profit of $0.02 on top-line sales of $1.83 billion. If realized, that expected earnings figure would be 63% below the same quarter a year earlier. Netflix has tended to beat Street expectations, doing so in eight of the past 10 quarters.

Its share activity has been part of the plot, too. NFLX is one of the so-called FANG stocks-Facebook (NASDAQ:FB), Amazon (NASDAQ:AMZN), NFLX, and Google parent Alphabet (GOOGL, GOOG)-a group of tech stocks that has outperformed the rest of its comparable tech field in recent years and ranks among the most popularly traded stocks based on volume. Thanks to that recognition and subscriber growth, NFLX's stock momentum propelled shares 135% in 2015 (figure 1). So far this year, the stock is down about 10%.

Stock Action

With an elevated implied volatility at the 80th percentile, short-term options traders have priced in a potential 11% share move in either direction around earnings, according to the TD Ameritrade thinkorswim platform's Market Maker Move indicator. A pick-up in call option buyers has emerged at the 105 and 110 strikes, while put option buyers appear focused on the 100 and 95 strikes.

Note: Call options represent the right, but not the obligation, to buy the underlying security at a predetermined price and over a set period of time. Put options represent the right, but not the obligation, to sell the underlying security at a predetermined price over a set period of time.

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Figure 1: 2015 Standout Performance? FANG-member Netflix can thank that high-profile stock distinction, as well as subscriber growth, for a 135% share gain in 2015. So far this year, the stock is down about 10% through Friday, January 15. Chart source: TD Ameritrade's thinkorswim platform. Data source: Standard & Poor's. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

Banks: Goldman is Next Up

Elsewhere in earnings, investment bank Goldman Sachs (NYSE:GS) is on tap to release earnings ahead of the market bell on Wednesday. Its report largely rounds out the string of as-expected to slightly improved banking-sector reports to hit in recent sessions.

As for GS, it may prove challenging for Wall Street to get a "clean" reading on banking performance. GS announced last week that it will fork over $5.1 billion to the Justice Department and other entities to settle mortgage-related claims. Those claims allege GS misled mortgage-bond investors about the quality of the assets that in part led to the 2008 financial crisis. The settlement will result in a $1.5 billion hit to earnings, GS said.

Already, industry analysts had been pulling down their GS earnings estimates for a few weeks. The latest consensus, according to Thomson Reuters, sits at $3.53 a share on revenue of $7.14 billion.

The quarter has gone relatively smoothly for the sector. Reporting early Tuesday, Bank of America (NYSE:BAC) said Q4 profit rose even during the tough trading conditions that jostled the broader sector. Profit of $0.28 per share topped the Thomson Reuters survey estimate for $0.26. Revenue rose to $19.53 billion from $18.73 billion a year ago. Analysts in the Thomson Reuters survey had expected $19.82 billion.

Morgan Stanley (NYSE:MS) early Tuesday reported adjusted earnings of $0.43 per share, which topped the Street's comparable estimate for $0.33 per share. Revenue of $7.7 billion was below $7.8 billion in the year-earlier period but above an expected $7.6 billion.

Last week, Citigroup (NYSE:C) reported a jump in earnings as its legal fees fell relative to comparable quarters. Revenue rose 3%, to $18.46 billion from $17.9 billion a year ago, the company's report revealed. Meanwhile, Wells Fargo (NYSE:WFC) topped Street expectations with a flat profit performance relative to a year earlier, but its $21.6 billion in revenue was below the Street's expected $21.8 billion. Company comments pointed to the dent of falling oil prices on its commercial loans to the energy sector.

Market indicators flash some signs that interest in trading the banking earnings could continue. GS implied volatility sits at the lofty 80th percentile. Short-term options traders are pricing in a potential 5% move in the share price in either direction around earnings, according to the TD Ameritrade thinkorswim platform's Market Maker Move indicator. Though the volatility is elevated, specific options trading has been subdued.

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Figure 2: 2015 Standout Performance? Goldman Sachs shares have the dubious distinction of being among the worst performers in these first few weeks in January. As of Friday's close, GS shares had backtracked 13.7% year to date. Compare that with the Dow 30, down 8.2%. In all of 2015, GS shares lost 8%, but have plummeted 22% from early November to Friday. Chart source: TD Ameritrade's thinkorswim platform. Data source: Standard & Poor's. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

TD Ameritrade, Inc., member FINRA/SIPC. TD Ameritrade is a trademark jointly owned by TD Ameritrade IP Company, Inc. and The Toronto-Dominion Bank. Commentary provided for educational purposes only. Past performance is no guarantee of future results or investment success.

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Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in C over 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.