I recently wrote an article about what appears to be a serious management shortfall in Netflix (NASDAQ:NFLX). The last earnings release demonstrates what I feared the most may happen. Netflix management is clearly leaving a lot of the money on the table and the ones paying the price are the shareholders. It wasn't my first article critical of management as can be seen with another article here.
I was one of the early bears with Netflix. It's not always easy having a bearish outlook on a company you like. It's true, I like Netflix and I watch it probably close to once a week. I don't watch much TV either because if it doesn't come through the Internet it's not going to display in my house. My wife and I made a choice about two years ago to give up cable TV. The money was a small part of it, but the main driver was not wanting to waste time getting "sucked into" TV shows.
There is such a disparity between what the various content providers charge. On one hand you have Dish Network (NASDAQ:DISH) with "Test Drive" and Blockbuster@Home offering everything from a welcome pack at $15/month to "Everything" at a cost of $75/month. Plus Dish doesn't stop there; they also offer ways to even buy more items like pay-per-view. Clearly each customer of Dish is worth a lot more than a customer of Netflix even if Netflix is able to sell both offerings.
Comcast (NASDAQ:CMCSA) is the same as Dish in monetizing revenue. Comcast offers packages at much higher prices to begin with and then upsells customers from there. On top of making more money per customer than Netflix, Netflix also needs Comcast to stream content through to the consumer.
Investors caught in the current quagmire of Netflix may want to re-examine just what place Netflix has in the entertainment business. If the goal is to provide a mix of old, B movies and or TV shows without commercials I believe Netflix is going to find others offering a much higher and current entertainment experience for consumers along with all the "other stuff" consisting of the sum total of Netflix content on the side.
It's not even a matter of it's going to happen, as it's already happening. Apple (NASDAQ:AAPL) is one of the best examples and a business model one would have thought Netflix would have quickly adopted into its mix. Not to be outdone, Amazon (NASDAQ:AMZN) offers everything including the kitchen sink when it comes to entertainment. You can buy the TV to watch the movies on, The Blue-Ray player to watch a movie on or a computer to stream to your new TV from Amazon, the surround system and on and on. If the local downtown store in my home town can figure out how to sell products online I have to believe there is enough talent somewhere in the halls of Netflix to do the same.
So we know it's bad and after the gap down it's a safe bet to believe many shareholders are thinking it's "more" than bad. More than likely many are also asking "what now?" and it's fully understandable. If you ask Rocco Pendola, he has an opinion. You can read his latest article here. I bring up Rocco for a couple of reasons. Firstly, while many have called Netflix a short including I, Rocco called Netflix a short at the RIGHT time. Knowing what the market will price any given stock at in the future is only half the battle. Having the timing correct is the other half and Rocco gets both correct. He even put his money where his words are which clearly gives his voice more weight. Anyone can sit back and call a stock a bull or a bear, but when you put your money on the line it means something.
The other reason I quote Rocco is because I don't share his opinion with Netflix. Rocco and I even write an options newsletter together, but we often disagree with stocks. I believe a change in management or a change in attitude with current management will turn Netflix around. I also believe it will happen and sooner than later (although I would imagine not soon enough for most).
Based on my years of experience with gap downs in earnings reports similar with Netflix I would expect a good chance that tomorrow or Thursday will mark the short term low. This generally is followed by bargain hunters picking up shares cheap to flip over. After retracing up to the area of about 50-75% from the gap down price of $101.84 before earnings. Expect the price to continue to fade lower absent news of a serious shift in revenue and or earnings expectations (The management and or policy shift I have written we need so badly).
Want to see a classic miss earnings result a few weeks after the fact? Take a look at Pandora (NYSE:P). Pandora disappointed and went from $14 down to the current sub $9 price. Also take close note to the next few days after earnings. This is a classic pattern I see often and you can too. Simply use your software to look at charts from the last few quarters and review the ones that gapped down the next day.
What's the play now? Currently there is actually opportunity to get long Netflix today, Wednesday and or Thursday. I like the $90 and or $95 April weekly call options for the premium. I would hedge either buying the stock and or hedging with a $100 strike with the same expiration date. Don't get greedy, and the combination of time decay with resistance above $95 and $100 makes this one worth looking at. I will also look to make one of these types of trades starting tomorrow.
Disclaimer: Robert Weinstein uses information believed to be correct, but is not guaranteed and is not independently checked for accuracy You may wish to use this article as a starting point of your own research with your financial planner.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in NFLX over the next 72 hours.