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Netflix (NFLX) drops in after hours, how to trade it?

Published on April 26, 2011

Netflix (NFLX) drops in after hours, how to trade it?

April 26, 2011

Netflix (NFLX) announced mixed set of results and stock is trading down -5.27% in the after market hours. I mentioned NFLX first here , then here and we traded it both times pretty successfully. Before I dive for another trade, here is the earnings detail from Briefing.com

16:15 NFLX Netflix beats by $0.03, beats on revs; guides Q2 EPS below consensus, revs above consensus (251.67 -0.55)

Reports Q1 (Mar) earnings of $1.11 per share, $0.03 better than the Thomson Reuters consensus of $1.08; revenues rose 20.7% year/year to $719 mln vs the $703.6 mln consensus. NFLX reports Q1 gross margin of 39.0% vs 36.5% street expectations. NFLX reports Q1 Total Subscribers of 22.8 mln vs 21.9-22.8 mln Domestic guidance; Total Subscriber at the end of Q1 was 23.6 mln compared to 22.65-23.7 mln Sub guidance (Domestic & Intenrational). Free Cash Flow rose to $79 mln compared to $51 mln in Q4 and $38 mln in prior year period. Operating Margin was 16% in Q4, above the 14% guidance. Co issues mixed guidance for Q2, sees EPS of $0.93-1.15 vs. $1.19 Thomson Reuters consensus; sees Q2 revs of $778-798 mln vs. $763.01 mln Thomson Reuters consensus. Co expects Total Subs at the end of Q2 to be in the range of 24.9-25.85 mln (Domestic & International) and Net Income in the range of $50-62 mln.

So far, at least for now, neither the Facebook killed Netflix (NFLX) nor cable operators/ wannabe are able to crush it. It was able to deliver both Earnings/Revenue above street’s expectation. They might be learning from Apple (AAPL) to UPOD (under promise, over deliver) but only time will tell us if they succeed in it.

Here is a Netflix (NFLX) chart, same as I have been sharing since Dec 2010. Yellow channel extends almost 16months, while cyan channel is about 10months old.

Using the two channels, any swing trader could have played Netflix nicely. Post earnings, NFLX is down about $13 (or little over 5%) to $238.40. I was expecting it to move roughly 8% (in either direction). If I combine technical, greek parameters and swing trading, it might drop to $230 before any meaningful bounce. So might look for a May 220/230 Bull Put Spread if NFLX drops to $229-$232 area.

Albeit, pls note that if the past two trade ideas were successful then that doesn’t mean this trade will be successful too. Trading is all about likelihood so make sure you have a risk management/exit plan in advance should you choose to enter into this trade.

Profitable Trading, OP

2 Comments

  • Avatar tag says:

    OMG,, are we as a country so stupid and lazy that we cant figure out there was only 10 hours of shorts in the stock! it RAN OUT OF BUYERS JUST LIKE AAPL DID ON ITS ‘GREAT EARNINGS’ –STOP ******* FOLLOWING THE HEADLINES OF THE ‘EARNINGS,, NOBODY DOES DD’ THEY JUST CHASE ‘WHATS HOT’ AND THE TWITTERHEADS TO PUMP THESE MOMO’S EVEN SAID THEY WONT HOLD OVER NIGHT.-our country is in a jam because we have way too many people willing to follow the press and too stupid to do the math themselves much less ‘figure it out’

  • Avatar OptionPundit says:

    Math is long gone…ever heard of negative liability on the balance sheet (http://www.federalreserve.gov/releases/h41/20110106/); but guess what, math is math and it comes back time and again to provide value to astute trader/investors (I am not one of those)..just like irrationality prevails during bearish times, it does so during bullish times too.. then again there are fundamentals and underlying do revert to the means..but ..over a period of time. We are living in interesting times…

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