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Education Series: Single-Stock ETPs

Is Netflix on the Ropes?

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Websim is the retail division of Intermonte, the primary intermediary of the Italian stock exchange for institutional investors. Leverage Shares often features in its speculative analysis based on macros/fundamentals. However, the information is published in Italian. To provide better information for our non-Italian investors, we bring to you a quick translation of the analysis they present to Italian retail investors. To ensure rapid delivery, text in the charts will not be translated. The views expressed here are of Websim. Leverage Shares in no way endorses these views. If you are unsure about the suitability of an investment, please seek financial advice. View the original at

The end of an era?

Netflix (NFLX) has had a rough year to say the least. After a decade of outperformance that saw it rise to the S&P 500’s top holdings and cement its place among the FAANG cohort of stocks, the company is now facing strong headwinds.

Year-to-date (YTD), shares of Netflix are down over -69%, with the stock trading at around $183 per share, significantly lower than its 52-week high of $700 per share. The stock cratered twice this year following disappointing earnings reports, with a 25% after-hour drops on January 20th and April 19th.

The fundamentals have changed

Netflix enjoyed strong earnings during the pandemic era that saw great demand for its products and services when consumers were searching for alternative entertainment sources during various lockdowns and quarantines.

Since then, this fortune has been dramatically reversed, with the company reporting a loss of over 200,000 subscriber during its Q1 2022 earnings call, marking its first decline in paid users in more than a decade. In contrast, analysts had expected an addition of 2.73 million.

Revenues also came in lower than analyst consensus estimates, at $7.87 billion vs $7.93 billion. Further, Netflix revised guidance for Q2 2022, forecasting a continued loss of global paid subscribers to the tune of 2 million. In addition, management described slowing revenue growth, rampant account sharing, and competition from new streaming companies as risk factors moving forward. The company also laid off 150 employees on May 18th.

Despite this, Netflix still increased its free cash flow, up to $802 million for Q1 2022 versus $692 million the year prior. As well, earnings-per-share (EPS) exceeded consensus analyst estimates at $3.53 versus $2.89. The company is also considering implementing an additional tiered pricing model with the addition of advertisements for lower subscription fees.

Potential trading ideas

Netflix’s next earnings report is estimated to occur sometime in mid-July 2022 based on the timing of last year’s reports. Investors will be keenly watching several figures, mainly the revenue and subscriber growth (or loss). Until then, Netflix’s share price will likely remain volatile, especially as the rest of the FAANG cohort struggles against the current rising interest rate environment and NASDAQ bear market.

A common way for investors to bet on an earnings call is through the use of options. Typically, buying out-of-the-money calls or puts with a few weeks until expiry could lead to outsized gains if your prediction is correct.

There is a significant risk though – the chance of an implied volatility (IV) crush occurring. An IV crush is a fast, sharp drop in implied volatility that drastically reduces the value of an option contract. This often happens after a major event for a stock, such as earnings announcements. Even if investors make the right call for the stock’s movement direction, their call or put option can still lose value due to IV crush.

A better alternative

Leverage share’s suite of leveraged exchange-traded products (ETPs) allow investors to take magnified long or inverse exposure to shares of Netflix, without needing to worry about the intricacies of trading options and worrying about IV crush.

Investors bullish on Netflix can use products like NFL3 and NFL2 to gain 3x and 2x daily leveraged exposure respectively. Buying these products before an upcoming earnings call can be a great way to speculate on price movements. Investors bearish on Netflix or interested in hedging an existing long position can also buy NFLS to gain 1x daily inverse exposure.

The physically backed nature of all three ETPs ensures good liquidity and a narrow bid-ask spread, allowing you to enter and exit positions easily. Your risk is also capped based on how many shares you hold, making position sizing easy (just buy and sell shares) compared to calculating options delta.

Your capital is at risk if you invest. You could lose all your investment. Please see the full risk warning here.

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Sandeep Rao

Research

Sandeep joined Leverage Shares in September 2020. He leads research on existing and new product lines, asset classes, and strategies, with special emphasis on analysis of recent events and developments.

Sandeep has longstanding experience with financial markets. Starting with a Chicago-based hedge fund as a financial engineer, his career has spanned a variety of domains and organizations over a course of 8 years – from Barclays Capital’s Prime Services Division to (most recently) Nasdaq’s Index Research Team.

Sandeep holds an M.S. in Finance as well as an MBA from Illinois Institute of Technology Chicago.

Violeta Todorova

Senior Research

Violeta joined Leverage Shares in September 2022. She is responsible for conducting technical analysis, macro and equity research, providing valuable insights to help shape investment strategies for clients.

Prior to joining LS, Violeta worked at several high-profile investment firms in Australia, such as Tollhurst and Morgans Financial where she spent the past 12 years of her career.

Violeta is a certified market technician from the Australian Technical Analysts Association and holds a Post Graduate Diploma of Applied Finance and Investment from Kaplan Professional (FINSIA), Australia, where she was a lecturer for a number of years.

Julian Manoilov

Senior Analyst

Julian joined Leverage Shares in 2018 as part of the company’s premier expansion in Eastern Europe. He is responsible for web content and raising brand awareness.

Julian has been academically involved with economics, psychology, sociology, European politics & linguistics. He has experience in business development and marketing through business ventures of his own.

For Julian, Leverage Shares is an innovator in the field of finance & fintech, and he always looks forward with excitement to share the next big news with investors in the UK & Europe.

Oktay Kavrak

Director

Oktay joined Leverage Shares in late 2019. He is responsible for driving business growth by maintaining key relationships and developing sales activity across English-speaking markets.

He joined LS from UniCredit, where he was a corporate relationship manager for multinationals. His previous experience is in corporate finance and fund administration at firms like IBM Bulgaria and DeGiro / FundShare.

Oktay holds a BA in Finance & Accounting and a post-graduate certificate in Entrepreneurship from Babson College. He is also a CFA charterholder.

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