Netflix: New Giant ; Stock Near All-Time High But Volatility Collapses

Netflix Inc, (NFLX) , incorporated on August 29, 1997, is an Internet subscription service streaming television shows and movies. The Company’s subscribers can watch unlimited television shows and movies streamed over the Internet to their televisions, computers and mobile devices, and in the United States, subscribers can also receive digital versatile discs (DVDs) delivered to their homes.

I found this stock using a real-time custom scan. This one hunts for depressed vols. NFLX is getting dangerously close to a multi-year low in implied vol.

Custom Scan Details
Stock Price GTE $5
IV30™ GTE 20
IV30™ Percentile LTE 10
Average Option Volume GTE 1,200

I actually just wrote a sort of seminal piece on NFLX and how it has become one of the most powerful firms in the entertainment industry. Here are a few snippets from my article when the stock hit a new all-time high (9-10-2013). You can read the entire article by clicking here:

So why is this happening to NFLX? Well, a lot of reasons, but one of the biggest is pretty simple:

NFLX now decides which TV shows are hits. Yeah, that's right. For example, the AMC original show Breaking Bad, the highest rated TV show ever by meta critics, was at a point after season 4 where its record viewership for any one episode was ~1.5 million people. That's actually very low. CBS has nights where shows hit 20 million. The Walking Dead (also on AMC) hit over 12 million. So, Breaking Bad, though a bonanza on the critical side, was actually kind of a poor performer in terms of viewership. Then NFLX happened.

An agreement was struck to put all of the "Breaking Bad" old seasons on NFLX for free (everything is free on NFLX with the monthly subscription). The first episode of season 5 aired to 3 million viewers (so a 100% increase). Then, the first episode of season 5 part II aired to 6 million viewers (NB: My numbers may be off wrt which season the bump(s) happened, do some fact checking before quoting me). OK, OK, is this really b/c of NFLX? Well, here's a direct quote from the show's creator, Vince Gilligan:

"I am grateful as hell for binge-watching. I am grateful that AMC and Sony took a gamble on us in the first place to put us on the air. But I'm just as grateful for an entirely different company that I have no stake in whatsoever: Netflix. I don't think you'd be sitting here interviewing me if it weren't for Netflix. In its third season, Breaking Bad got this amazing nitrous-oxide boost of energy and general public awareness because of Netflix."


Why does this matter? How about this... Instead of NFLX paying for content, the content providers may pay NFLX to air their shows. That's incredible.

Add to the fact that NFLX now has critically acclaimed original content -- that's content available ONLY on NFLX ("House of Cards" and "Orange is the New Black" are two of them) and what we're slowly finding here is that NFLX may become the most powerful content distributor for TV (the profitable part of the entertainment business) on the planet.

Don't laugh or roll eyes, it's happening right now. FOX is tying the same game as AMC did with "Breaking Bad" with their sitcom "The New Girl." And you know what?... it's working again...

Now NFLX does have competitors, namely Amazon (AMZN) (I know they're not the first name to come up from entertainment industry folks, but the entertainment industry is wrong -- AMZN is the risk for NFLX). Another risk is the content creators using their own channels (no pun intended)... but that doesn't seem to work so far (and yeah I know what Hulu is and who created it).

Here's more news, from CNBC a day after I posted this article:

Groundbreaking news that Virgin Media is bringing Netflix directly to its set-top box in the U.K. in effect elevates Netflix to the status of a new cable network-a benefit for a cable company and beyond being an upstart threat to cable.

The deal, which makes Netflix available on cable set-top boxes for the first time, was announced Monday. On Tuesday, Netflix shares hit a new all-time high, trading 6.5 percent higher to $313, flying past its record $304 on July 13, 2011.

The stock's nearly 220 percent gains this year have been driven largely by the success of its original content deals, which have helped add new subscribers, giving Wall Street confidence that exclusive originals will continue to deliver.

(More from Julia Boorstin: Is Apple's iRadio a Pandora killer? )

Virgin's parent, Liberty Global (LBTYA), gained just under a percentage point on Tuesday's news.

Virgin Media's partnership with Netflix is the first time a cable operator is bringing the streaming service directly to the set-top box. Other cable operators-like Comcast (CMCSA)-allow users to access Netflix through Internet-connected set-top boxes-but this is the first time a cable channel has directly made a deal with Netflix to treat its content just like that provided by cable channels like HBO (owned by Time Warner (TWX)) and Showtime (owned by CBS (CBS)). (Disclosure: Comcast is the owner of NBCUniversal, the parent company of CNBC and CNBC.com.)

Virgin will integrate Netflix with its television content so it's easy to seamlessly browse and search across both TV and streaming content.

Source: CNBC via Yahoo! Finance Why Netflix is at a new all-time high, written by Julia Boorstin.

Let’s turn to the two-year NFLX Charts Tab below. The top portion is the stock price; the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).

On the stock side we can see the impossible upswing from ~$50 to over $300. A firm that was buried has now not only come back to life, but is looking to eat other firms’ life too. But, all along there is also a volatility story. Let’s turn to the two-year IV30™ chart in isolation, below.

Check out that dipping volatility. We’re within inches of seeing a new multi-year low in volatility as this stock has moved up ~500% in a year and has the makings of a potential industry giant. I sometimes hear the phrase “disruptive technology” misused and thrown around… well, this may be an apropos time to use the phrase, because NFLX is disrupting everything.

Finally, let's look to the Options Tab (below) as of the close yesterday.

Across the top we can see that Oct is priced to 37.42% (36.87% as of this writing) while Nov is much higher at 52.28% (52.11% as of this writing). NFLX has earnings due out at the end of Oct (outside Oct expiry), so that elevated vol is reflecting earnings risk. My question is, what about before earnings? What about pre-announcements from the networks if things are “working” or if they aren’t “working” with NFLX. A multi-year low in the implied at this point feels… weird…

Disclosure: This is trade analysis, not a recommendation.

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