Streaming movie and television serial provider Netflix (NASDAQ: NFLX) saw its share price decline about 50% to $58.46 in the second week of February. The main reason for the decline in the share price is that the company added only 1.59 million US subscribers instead of the targeted 1.62 million. Furthermore, the fourth-quarter revenue missed analysts’ estimates by a narrow margin.
For the fourth quarter of fiscal 2015, Netflix reported revenue of $1.823 billion, compared to $1.738 billion in the fourth quarter of 2014. The consensus estimate of analysts was $1.826 billion. Surprisingly, the company was able to add 4 million international subscribers instead of the analysts’ expectation of 3.5 million. However, the international viewership does not garner the same amount of profit as the domestic viewership. Thus, the market is less enthusiastic about the global subscriber additions as of now.
Fundamentally, the company suffers from the following issues:
Firstly, the average revenue realization per subscriber is only $6.84 per month (or $82.04 per annum). On the other hand, the debt of Netflix has already crossed $10 billion. Thus, it is imperative that Netflix would be forced to increase the subscription rate soon. If not, the company will be unable to service debt. Furthermore, Netflix has a negative cash flow. Thus, a hike in the subscription is a must for the company to survive. The impact of the price hike on the subscriber base is certainly going to be a matter of worry in the future.
Secondly, the US-based content of Netflix cannot provide the same sort of impact elsewhere. For example, in multi-cultural Europe, content which is very well accepted in Germany, may not receive the same kind of reception in France. Furthermore, it is impossible to localize the content for viewers belonging to different regions. Such a process would result in a steep rise in costs. Netflix is yet to find a solution to this problem.
The forward PE ratio of the company is 114.9. To maintain such a high valuation, the company should at least double its subscribers every two years. The price to sales ratio of the company is 6.3, while the industry average is only 2.2. The five-year price to sales average of Netflix is only 4.3. This implies that the company is currently trading at a higher price. So, a 30% decline in the share price would correspondingly bring the price to sales ratio near the long-term average. Thus, fundamentally, a trader can expect the price to decline to approximately $70 levels in the coming weeks.
Technically, the psychological level of 100 is a resistance for the Netflix stock. Last major support exists at 90 levels. The MACD indicator is inching below the zero level. The main line of the indicator is currently below the signal line, thereby indicating bearishness.
Thus, a binary options trader should look for an opportunity to purchase a binary put option contract. An expiry period of one month (mid-April) and a strike price of about $90 would be a perfect recipe for success.
Disclaimer: Any financial trading analysis offered here is our opinion and is not intended as advice or direction for investors. We cannot guarantee the success of any trades made as a consequence of this article, and we encourage traders to incorporate a strong money management strategy to limit losses when they enter the markets. Please use this article as part of your own research before formulating strategies prior to trading.
