Netflix Battleground Status Becomes Only More Clear (NFLX)

Netflix, Inc. (NASDAQ: NFLX) has become a true battleground stock where bulls and bears fight it out to the death.  With shares trading around $120.00, the Big-V is a concern: valuation.  After all, with Thomson Reuters estimates of $2.65 EPS in 2010 and $3.54 EPS in 2011, it has forward P/E ratios of roughly 45 and 33, respectively.  What is interesting is that despite a confluence of possible drags against the stock, Netflix shares have risen 10% in just two days.

The first issue against Netflix is a proposed postage rate hike from $0.44 to $0.46 per stamp.  Whatever the bulk postage rate for Netflix will be, that will be a direct hit to its operating expenses (after 2010).  Janney Capital’s Toby Wilbe reiterated a SELL rating yesterday based upon valuations because the postal rate hike will boost its operating costs.

Zacks is positive now, cautious longer-term, and elaborated much more on this in a research note this morning: “The expectations of a tremendous growth from the new licensing deal are reflected in our short-term Outperform rating (for the next 1-3 months), implying a Zacks #2 Rank.  However, over the long-term (in the next 6-to-12 months), we have a Neutral rating on Netflix.

After looking around, most comments around the recent Relativity pact put Netflix competing more directly against HBO and Showtime.  The near-death experience of Blockbuster is, of course, a win for the company, although that death is slower than most imagined.

There was also a small round of insider sales that came out last week before the long weekend.  This does not seem to be worth millions of dollars or have any red flags.

The company announced last week that it would release earnings on Wednesday, July 21, 2010.  This may seem routine, but the reality is that if the company had any horrific data to release it would have probably released it by now.

Lastly, the short interest is actually less elevated even it remains very high:

• 06/15/2010 9,866,710
• 05/28/2010 9,094,506
• 05/14/2010 9,450,080
• 04/30/2010 10,193,474
• 04/15/2010 10,716,465
• 03/31/2010 10,369,387
• 03/15/2010 11,163,944

There is also the stock option angle.  The earnings date of July 21 means that options expiration date of July 16 comes before the company reports earnings.  In short, options traders will have to go out to August to play the earnings report.  With the premiums being so high for this high-priced high-beta name, it is tough to use options in Netflix.  Buying a $120 straddle costs almost $8.00 for expiration in only 6 more trading days after today, so shares have to go above $128 or under $112 for you to profit from the trade.  For August, that $120 straddle costs almost $20.00, so shares would have to fall to under $100 or rise above $140 for that trade to be profitable.

With a gain of over 10% in the last two days and with shares flirting with $120.00, and adding in the 52-week range of $37.93 to $127.96, anything seems possible here.  Shares were under $87.00 before the last earnings report, and shares jumped to $100.00 the day after earnings.

For whatever it is worth, A stock split announcement seems an assured thing.  The last, and only stock split, was a 2-for-1 split back in 2004 when shares were in the $70’s then and only in the $30’s on a post-split adjusted price basis today.

A battleground stock indeed.

JON C. OGG