NFLX Hits 2-Year Low After Earnings: Can Ads, M&A Activity Lead to Rebound?

We're back on morning trade live. Check out the one day charts, the Netflix and the reaction to yesterday's earnings report. The stock hitting a new 52 week low today with this 8.5% pullback here. Obviously this is something we've been tracking for a while. Netflix shares been struggling of late. It was interesting because we did see actually an initial pickup off the back of that whole Warner Brothers episode. Perhaps some sigh of relief, but we've come off a bit since. And so obviously we've got these earnings yesterday, a disappointment to the market. So let's get out to Alicia Reis, SVP, Equity Research, Media Entertainment at Wedbush. Alicia, you kept your outperform rating on the shares. You did lower the price target from 118 to 105 post earnings. You say the pros outweigh the cons, but proof will take time. Let's focus on those pros and cons. Which ones outweighed each other? Yeah, I'd say so. The quarter didn't meet the investor expectations. The Q3 guidance was underwhelming. Netflix only narrowed its revenue outlook for the year instead of raising it. And, you know, you know, it's it's going to only share engagement data with investors only once a year instead of twice starting in 27. So that just means less transparency, right? When you know, the trend has turned positive. Now let's, let's talk about that. The, the best news in the quarter was people are watching more Netflix. Again, the viewing hours grew about 2% in the first half of the year. And that's a third straight period of acceleration. So that's really the number that had worried investors. And it's it's moving in the right direction. But let's be clear on this. They they're spending 10% more on content this year and getting a 2% increase in, in viewing hours. Now on, on its face, that doesn't look great. But what's more important, I think, is that live sports is a smart bet. They're spending significantly more on live sports or Life events and getting a smaller share of engagement. But those. Those viewing hours are, you know, lifting pretty heavily. That's significantly more new signups and also significantly more ad revenue on those viewing hours. So it's very worthwhile to spend that money even with the lower. The video game push is gaining traction. And the advertising business overall is, you know, it's growing. It's just going to take a little while for Netflix to really show all of this in its numbers. And because they're pulling back some more data that investors really appreciate, you know, it's, it's easy to walk away and just give this one some time to breathe. Yeah. I mean, seemingly it failed to sort of settle any of the major debates out there. That was according to Morgan Stanley. They've also said they believe the engagement fears appear overblown. Would you agree with that? Yes, I absolutely agree with that. I think the engagement is you know, it's it's fine. It's growing. It's not decelerating so much. It's been at a, you know, a low pace. And Netflix is spending more on content, like I said, but the content that they are spending money on is working. It's really valuable content. All that live events and the live events, especially the sports are really expensive and they're going to remain expensive. But the draw for advertisers, where Netflix can advertise across its tiers, not just on its ad tier, is invaluable to them. As is, you know, the video game push, the podcasts, all of this content, some of that's going to be significantly cheaper and just keep churn low, especially, you know, you have playground for children up three, three times in daily players since April. That's meaningful. I think that keeps a lot of families on board, especially as there's no advertisements on there. It's highly curated, you know, content, gaming content, and that's hard to find these days. What about the M&A strategy? We obviously know that this has become a big part of it. Did we learn anything? Do you anticipate anything further on the horizon? Yeah, I think they didn't need Warner Brothers. But it's a real nice to have. Like we've been saying, as will any other content purchase or or M&A be Netflix pays a lot of money for licensing content and it will continue to do so if it owns the content that's significantly less in, you know, in perpetual licensing fees that it will have to pay so it can save some money and have all that content on board and try to exploit some of that content for its own audience that it knows quite well. And so, you know, we do expect some more M&A on the horizon. We did see a huge share buyback in the quarter with some of that money from the Warner Brothers deal, and we expect more upcoming a little bit of debt pay down. But there's plenty left for an acquisition, perhaps not the size of Warner Brothers, but NBC universal might be on, you know, on the docket pretty soon. If not, there are plenty of plenty of smaller studios that Netflix might go after, and we think it would be wise to do so. Great stuff. As always, thank you so much for the breakdown on Netflix post these earnings. Alicia Reeves, their SVP of equity Research, Media and entertainment over at Wedbush. Let's try it now with Tom white, host of Fast Market. Good morning Tom. Happy Friday. Sorry about the Sydney Swans last night. I'd be very impressed if any of our viewers actually know what I'm talking about. But go the crows. How would you approach the Netflix for example purposes today? Yeah, Sam, I was pretty sad after that AFL match. But at the same time, Netflix a lot of investors said hitting nearly two year lows in today's session. That lack of transparency that your guest mentioned being, I think the culprit here and the lack of growth moving forward. So we'll continue to watch that. But like I said, the stock is oversold on a technical basis at this point, hitting those lows. So I looked at a strategy instead of maybe buying the shares. We do something that's super bullish by using two different call and a put that are both bullish in nature. We call this a combination trade. Or as I like to look at it, a bullish risk reversal here where I went out to the September monthly option. So this is 63 days until expiration. You got two months in this position where I'm going to sell an out of the money 65 strike. Put that. You collect a credit on that. And that's going to help pay for part of the call that you're buying in September, the September 68th strike call. So buying 68 call selling the 65 put both are bullish. You're paying roughly about $1.60 debit for this combo trade. So that will take your break even up to 6960 to the upside. That's about 2.5% above the current share price. But you can see from this risk profile that anything above that break even is going to be profitability, right to infinity, to infinity, basically on that side. But you've got two months in this position. The key thing here is that you have to remember that if the stock does fall back below 65, you're going to have to buy the shares, right. That's that's going to make this a little bit more capital intensive. So you have to be steadfast in your idea that, hey, if the stock does continue to move lower, goes below 65, then I'm willing to own the shares below those levels. But this gives you some a lot of upside exposure over the next two months. But like I said, there's a lot of risk in this trade. The stock were to somehow go below 65. But hey you just got to be comfortable owning the shares below that level at this point. Sam. Yeah, absolutely. And look Morgan Stanley kept an overweight rating on the shares. Piper Sandler also keeping overweight with a price target of $85 lowered. But keeping that rating as I