Big Netflix Trade Idea Following $10 Billion Quarter
After a comfortable consensus beat, the streaming king could be ripe for a lucrative trade.
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As a consumer, I am no fan of Netflix NFLX. If not for my wife, who is indeed a fan of the most successful streaming business in our universe, we would no longer subscribe.
My longtime readers know darn well that I have tried more than once to short this stock, unsuccessfully for the most part, more than once, anticipating that increased competition and price hikes would hurt the stock more than it ever has. To put it bluntly, as Disney's DIS Disney+ and ESPN+, Comcast's CMCSA Peacock and Paramount Global's PARA Paramount+ have never really pressured Netflix, my track record in this name leaves plenty of room for improvement.
For the firm's fourth quarter, which ended December 31, Netflix posted a GAAP EPS of $4.27 on revenue of $10.247 billion. These top- and bottom-line numbers both comfortably beat Wall Street's consensus view for the period, as that sales print reflected year-over-year growth of 16.1%.
Perhaps most impressively, global paid memberships increased by 19.91 million accounts to 301.63 million. This was nearly double the number of additions that had been anticipated. The firm reminded investors in the press release that starting with the current quarter, paid memberships will no longer be reported on a regular quarterly basis, though the firm will continue to announce total paid memberships as key milestones are crossed.
Operations
As revenue grew 16.1% to $10.247 billion, cost of revenue grew 5.8%, sales and marketing expenses grew 6.6% and administrative costs increased 15.3%, leaving an operating income of $2.273 billion. This was up a stunning 51.9% from the year-ago comparison as operating margin improved from 16.9% to 22.2%.
After accounting for other income and expenses, interest and taxes, net income increased 99.3% to $1.869 billion. This works out to GAAP earnings of $4.27 per fully diluted share, up sharply from the $2.11 reported for the same quarter one year earlier.
Regionally
- U.S. and Canada added 4.82 milion net paid memberships, as average revenue per membership grew from $16.64 to $17.26.
- Europe, Mid-East, Africa added 5 million net paid memberships, as average revenue per membership grew from $10.75 to $11.11.
- Latin America added 4.15 million net paid memberships, as average revenue per membership decreased from $8.60 to $8.00.
- Asia/Pacific added 4.94 million net paid memberships, as average revenue per membership grew from $7.31 to $7.34.
Fundamentals
For the period reported, Netflix generated $1.537 billion in operating cash flow. Out of that number came $158.7 million in capex spending. This left free cash flow of $1.378 billion. Out of that number, Netflix repurchased $963.7 million worth of common stock for its treasury. The firm does not pay shareholders a cash dividend.
Turning to the balance sheet, Netflix ended the quarter with a cash position of $9.584 billion and total current assets of $13.1 billion. Current liabilities add up to $10.755 billion, including both $1.784 billion in shorter-term debt and deferred revenue of $1.52 billion. This puts the firm's headline current ratio at 1.22, which passes muster. After adjusting for deferred revenue, which is not a true financial obligation, this ratio rises to a healthier 1.42.
Total assets amount to $53.63 billion, which is mostly content. Total liabilities less equity comes to $28.887 billion. This includes longer-term debt of $13.798 billion. I don't love the size of the debt load, but with a cash position like that and with free cash flow what it is, all that would be needed, would be a less aggressive equity repurchase program in order to whittle that debt-load down if need be.
Guidance
For the full year 2025, Netflix is projecting revenue of $43.5 billion to $44.5 billion, which would be good for growth of 12% to 14% over the full year 2024. This also pulls the midpoint of the range above the $43.9 billion that Wall Street had been looking for.
For the current quarter, the firm is looking for revenue growth of 11%, which would land the print at $10.42 billion, or slightly the consensus view of $10.5 billion. This should produce a GAAP EPS of roughly $5.58, which is admittedly well below the $5.85 that investors had in mind. In short, the firm sees a slightly below par quarter followed by a better-than-expected full year.
Wall Street
Needless to say, Netflix is heavily followed on Wall Street. I have found 27 highly-rated (four-plus stars at TipRanks) sell-side analysts that have opined on NFLX since last night. After allowing for changes, among the 27, there are 19 "buy" or buy-equivalent ratings and eight "hold" or hold-equivalent holdings. Three of these "holds" did not set target prices, so we are working with 24 of those.
The average target price across these remaining 24 analysts is $1,124.54 with a high of $1,494 (Barton Crockett of Rosenblatt Securities) and a low of $875 (Bryan Kraft of Deutsche Bank). Once omitting these two as possible outliers, the average target across the other 22 drops slightly to $1,119.09.
Because I know you are interested, the average "buy" target stands at $1,175.47, while the average "hold" target sits at $931.00.
My Thoughts
Really this was an amazing quarter. Operating margins have jumped, operating income has popped. Net income and GAAP EPS have roughly doubled from their year-ago comps. Cash flows are strong. The balance sheet is not weak but could be improved upon with slightly better management of the firm's cash flows. Full-year guidance is fine even if current quarter guidance was moderately disappointing. All in all, this is an excellent report.
The stock has clearly broken out on Wednesday. Readers will see however that the shares remain well within a Pitchfork model drawn back to mid-October 2023. The shares had tested the lower bound of the Pitchfork a couple of times this pat Autumn, now it's time to see if a run can be made for the upper trendline of said pattern.
Relative strength has exploded higher on Wednesday morning's pop as the daily MACD has just as suddenly taken on a more bullish appearance. The only fly in the ointment would be the unfilled gap created overnight which at some point could reel the share price back in.
Not that earlier this week, the stock's 21-day EMA crossed above it's 50-day SMA. This likely has the swing traders involved in this name and they will take their profits after they are certain the swing part of what they do is about to turn into a pendulum.
In short, I feel that NFLX is a better short-term short trade idea (dangerous) for now than an investment. The shares become more attractive for a long-side trade closer to the middle trendline of the Pitchfork than they do here, in my opinion.
Someone seeing this stock and this stock in the same way I am, might be interested in getting long on a bear put spread such as this (in minimal lots):
- Purchase one February 21 $965 put for about $27.40
- Sell one February 21 $945 put for roughly $19.00.
- Net debit: $8.40
Note: The layout is on the huge side due to the underlying stock's volatile nature. Put bluntly, the trader would be willing to bet $840 that the stock will trade below $945 within four and a half weeks in order to win back $2,000 for a 138% profit. Max loss would be the premium paid ($840).
At the time of publication, Guilofyle had no positions in any securities mentioned.
