Netflix Inc. is one of the fastest growing companies on the stock market, but the streaming media giant’s shares have dropped over 24 per cent in July after its second quarter report revealed dismal subscriber acquisitions. Netflix made the situation worse when it reported lower expected revenue for the third quarter than estimated by analysts.
The report sent the company’s share prices in a tailspin. Ever since, the stock value has somewhat recovered, and many experts are even predicting a 7 per cent rise over the next few weeks.
Netflix Inc.’s shares have dropped over 24 per cent in July after its second quarter report revealed dismal subscriber acquisitions
Disappointing Second Quarter
Netflix recently experienced some turbulence in growth after reporting disappointing earnings in its second quarter, but things finally seem to be getting back on track for the streaming giant. After shares rallied up to highest value in June, prices fell by 20 per cent to its yearly low in August.
But the firm’s performance chart shows that its recovery has legs. Last week was Netflix enjoyed its best performance of 2018 after stocks rallied 12 per cent.
Most option traders are betting on the company’s quick rebound and some have even predicted a 15 per cent rise in share prices by the beginning of 2019. If this prediction were to come true, Netflix stocks will go back to its previous trading price of $425. Currently shares are trading around $370.
At the beginning of August, Netflix finally broke free from its bearish downtrend, but stock prices remained shaky for a while before slowing climbing up. With the sharp uptrend, many are speculating that the prices could soon cross the $400 mark, an 8 per cent increase from its current value.
Call Contracts
With many investors betting bullishly on stock prices, it looks like Netflix is gearing up for more growth by the start of next year. Currently options are running at a strike price of $370 with calls outweighing the puts by 3 to 1.
For call contracts expiring in mid-January, buyers will need the share prices to increase to $406 in order to break even. This bet would require the company to gain over 10 per cent, which currently seems like a tall order, especially with almost 3,000 open call contract worth $10 million relying on it.
Some traders are making even riskier bets by buying open call contracts at a strike price of $400. Such contracts have risen to over 7,000 in number, and in order for buyers to make a profit share prices will have to increase to $425 before the contracts expire. This amount roughly translates to a 15 per cent increase from Netflix’s current trading price. These open call contracts at $400 strike price are almost worth $16 million in total.
In its second quarter, Netflix only acquired 5.15 million new members, much lower that Wall Street analyst’s prediction of 6.27 million
Growth Ahead
Chief market technician Craig Johnson, from Piper Jaffray, says that his company has invested heavily in the company but the recent dip in prices hasn’t caused any damage to their investment portfolio. At the end of the day, Netflix is back on its primary uptrend and it looks like the stocks will only grow in the long term.
Despite the recent correction, its stocks have still rallied 94 per cent since the beginning of 2018, although growth was almost 120 higher at the year’s peak, in comparison to 2017.
Johnson says that smart investors have taken advantage of the recent dip to buy even more stocks before the value returns to the old highs. On Monday, Netflix grew over $370, and with just 2 per cent further increase, it could cross $380 and return to its normal growth levels.
In its second quarter, Netflix only acquired 5.15 million new members, much lower that Wall Street analyst’s prediction of 6.27 million. Some of the dismal subscriber growth was owed to the fact that the streaming giant didn’t have the same hits in the second quarter which had previously attracted viewers. Netflix shares plummeted by 24 per cent after it revealed the shocking second quarter figures.
