Focus of our stock coverage with specific trade recommendations is on big tech Twitter (TWTR) and Netflix (NFLX) - following the earnings and plenty of analyst activity (including debates and confusion) and development of interesting technical factors right before and after the quarterly earnings.
We have also published the Weekly Analysts' Activity, filtered the weekly expiration stocks, and paired it against our scorecard to find potential discrepancies and opportunities.
Readers that are not familiar with our analytical and research approach can read the theme section in our prior Seeking Alpha article from April 7: "Trading The Earnings And Analyst Ratings - Case For Alcoa, Walgreens, And Intel."
Table 1 - (Courtesy of Clarendon Global)
Table 2 - (Courtesy of Clarendon Global)
We will as a reference and starting point cover the analysts' take on the covered stocks (downgrade/upgrade, color, target, etc.) and focus in detail on our quantitative take on the stocks.
- Morgan Stanley analyst Benjamin Swinburne reiterated an Overweight rating on Netflix with a $450 target price.
- KeyBanc Capital Market's Andy Hargreaves maintained a Sector Weight rating.
- Wedbush analyst Michael Pachter maintained an Underperform rating with a price target increase from $165 to $183.
- Raymond James analyst Justin Patterson reiterated a Strong Buy and $470 price target.
- Buckingham Research Analyst Matthew Harrigan maintained a Neutral rating and lowered the price target from $382 to $358.
- Oppenheimer's Jason Helfstein maintained an Outperform rating and lowered the price target from $425 to $410.
- Guggenheim's Michael Morris maintained a Buy rating with a $420 price target.
- Tigress Financial's Ivan Feinseth said in his daily newsletter that Netflix could go as low as $250.
Our Take and Trade
There is no question that Netflix earnings were overshadowed by Disney's (DIS) announcement that they are entering the streaming market that spurred endless debates, where the actual analysts ratings were more influenced by trying to figure out how will this affect The Netflix business model and wild guessing the earnings forecast of the next quarter and year end (and beyond) which is most evident by a huge target price range discrepancy from 50% below the current price to 30% above the current price. We will not get into detail here as we are assuming that the readers are already familiar with the topic; however, we would like to recommend the article "Breaking Down the Streaming Wars: The Market Guide" published by Seeking Alpha's SA Marketplace which is excellent work in explaining and measuring the marketplace and competition.
We are firmly in the camp with the bulls, not only because of the bullish quantitative analysis that will follow below but also because of the other two important factors that were not acknowledged fully in favor of Netflix - immersion and growth potential with the international audience and deep knowledge in implementation of artificial intelligence and machine learning that is very critical in this business - and Netflix is the true champion ahead of everyone by leaps and bounds, including Disney. One of the most revealing and detailed articles on this subject we would recommend is "How Netflix Uses AI, Data Science, and Machine Learning - From A Product Perspective" written by Allen Yu and published by Becoming Human.
We think that the 420 target is very easy within the next 3 to 90 days, with minor resistance at 385. Relative strength is consistent (second row from bottom on chart below), short-term cycles are turning for the next leg-up (third row from bottom on chart below), and money-flows - speculative and institutional (fourth row from bottom on chart below) - are in line.
Chart 1 - Netflix (Courtesy of TD Ameritrade ThinkorSwim)
In addition to going long Netflix en route to 420 resistance target, another option is a "390/420 July 19th Bullish Call Spread" currently @9.25 debit, making the breakeven point for the trade @398.25 and maximum profit @420 and above at expiration. The upper one standard deviation price probability is @430 (light blue probability cone on the chart above) for the July 19th expiration - comfortably 10 points above the maximum profit @420.
Chart 2 - Netflix Option Spread P&L (Courtesy of TD Ameritrade ThinkorSwim)
First quarter results were highlighted by a top- and bottom-line beat while monthly active users (MAUs) exceeded expectations of 318 million at 330 million. Here is a summary of how some of the Street's top analysts reacted to the print.
- Nomura Instinet's Mark Kelley maintains a Neutral rating on Twitter's stock with a price target lifted from $31 to $33.
- Wells Fargo's Robert Coolbrith maintains at Overweight, price target lifted from $33 to $40.
- Morgan Stanley's Brian Nowak maintains at Equal-weight, price target lifted from $31 to $32.
- Canaccord Genuity's Maria Ripps maintains at Hold, price target lifted from $32 to $42.
- Guggenheim Partners' Michael Morris maintains at Buy, price target lifted from $41 to $44.
- Aegis Capital's Victor Anthony maintains at Buy, price target lifted from $41 to $48.
Our Take and Trade
Analysts were very cautious and neutral putting the price target of 20% above and below the current price, so we can conclude that there is no conviction, even less consensus from the analysts.
For case in point analysis dissecting wrong versus right focus on Netflix, we would recommend the article "Twitter: No Turning Back Now" written by Stone Fox Capital on Seeking Alpha on April 23rd.
We think that the 48 all-time high target will be reached in 30 to 45 days. We are seeing very similar signals and patterns as Netflix - relative strength is consistent (second row from bottom on chart below), short-term cycles are turning for the next leg-up (third row from bottom on chart below), and money-flows - speculative and institutional (fourth row from bottom on chart below) - are in line and turning bullish.
Chart 3 - Twitter (Courtesy of TD Ameritrade ThinkorSwim)
In addition to going long Twitter en route to 48 resistance target, another option is a "40/43/46/48 June 21st Bullish Tilted Call Condor Spread", currently @2.57 debit, making the breakeven point for the trade @42.57 and maximum profit between 43 and 45 at expiration. The upper one standard deviation price probability is @45 (light blue probability cone on the chart above) for the June 21st expiration - comfortably in the upper range of maximum profit.
Chart 4 - Twitter Option Spread P&L (Courtesy of TD Ameritrade ThinkorSwim)
Earnings results have turned out to be better than many in the market had predicted, following very visible earnings cuts over the recent period. Estimates for the current period (2019 Q2) have been coming down as companies have been reporting Q1 results and their outlook for business trends. Growth remains the biggest concern and question mark, so stocks like Netflix and Twitter delivering on the growth prospect will be nicely rewarded.
Netflix and Twitter are fundamentally solid stocks with the growth potential intact, also playing catch-up to the surging leader of the technology sector which also in our view are right at the low risk/reward turning an entry point en route to their all-time highs, following short bullish consolidation patterns.
Disclosure: I/we 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.