Netflix Inc. (NASDAQ:NFLX) reports second-quarter earnings after market close on Monday, July 16. The stock has had a massive rally in 2018, starting the year at $196 and recently trading around $400.
As has been the case in the past several quarters, analysts have been primarily focused on the company’s international growth as domestic growth has slowed. In Q1, NFLX added 7.41 million subscribers, 1.96 million from domestic and 5.46 million from international. That was about 900,000 more than analysts had been expecting, helped by faster growth in domestic subscribers.
For Q2, management issued guidance for 6.2 million subscriber additions, for a total of 131.2 million subscribers. 5 million of that is expected to come from international growth, and 1.2 million from domestic growth.
On Monday, NFLX is expected to report adjusted EPS of $0.80 on revenue of $3.94 billion, according to third-party consensus analyst estimates. In the same period last year, NFLX reported adjusted EPS of $0.15 on revenue of $2.79 billion.
When the company last reported, revenue grew 40.4% year over year to $3.7 billion and adjusted EPS was $0.64. At the same time, free cash flows were negative $237 million. With that report, management said it expects negative free cash flow between $3 billion and $4 billion for all of 2018.
Management also said it expects negative free cash flows to continue for several years as it continues to invest heavily in creating new content. In 2018, the company said it plans to have between $7.5 to $8 billion of content expenses.
NFLX has consistently raised debt to fund that content spending. In its last earnings report, management said they will continue to raise debt as needed to fund more original content, and that they “believe debt is lower cost of capital compared to equity.”
The company priced a $1.9 billion debt offering in April, more than the $1.5 billion it had originally planned. In Q1, NFLX’s interest expense was $81.2 million, up from $46.7 million in Q1 2017. 
Netflix is up almost 100% year-to-date heading into its Q2 earnings report. Over the past month, the stock has hit resistance around the $420 level, brushing up against that level several times. On Friday, the stock pulled back ahead of Monday’s report and closed down $17.70 to $395.80. Chart source: thinkorswim® by TD Ameritrade. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.
Netflix Trading Activity
Month after month over the past year, NFLX has regularly been one of the top net buys among TD Ameritrade clients, based on the Investor Movement Index®, or IMXSM.
Around the upcoming earnings release, options traders have priced in about an 8.2% stock move in either direction, according to the Market Maker Move indicator on the thinkorswim® platform. Implied volatility was at the 65th percentile as of this morning.
In short-term trading at the July 20 monthly expiration, calls have been active at the 400 and 410 strike prices, with volume of more than 6,000 contracts at each of those strikes during Friday’s session. Volume has been a little bit lighter on the put side and recent trading has been concentrated at the 400 strike.
Note: Call options represent the right, but not the obligation, to buy the underlying security at a predetermined price over a set period of time. Put options represent the right, but not the obligation to sell the underlying security at a predetermined price over a set period of time.
Next Up In Earnings
Q2 earnings season is underway and these are some of the other major reports this week:
- Goldman Sachs Group Inc. (NYSE:GS) (GS) and Johnson & Johnson (NYSE:JNJ) before market open Tuesday, July 17
- Morgan Stanley (NYSE:MS) (MS) reports before market open Wednesday, July 14, and IBM (NYSE:IBM) after market close the same day
- Microsoft Corporation (NASDAQ:MSFT) (MSFT) after market close Thursday, July 19
- General Electric Company (NYSE:GE) (GE) before market open Friday, July 20
Disclaimer: TD Ameritrade® commentary for educational purposes only. Past performance does not guarantee future results. Member SIPC. Options involve risks and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options.