/Netflix%20LogIn.jpg)
Netflix (NFLX) stock has been rising almost 26% in the past month and over 42.4% year-to-date. One reason has been that investors suspect subscriber growth will come in higher than expected, given the launch of its new shared password project.
This may make the stock look cheap to some investors, especially to traders in out-of-the-money (OTM) puts. They are able to generate good income plays with near-term OTM plays.
For example, as it stands now, with NFLX stock at $420.02 as of Friday, June 9, 2023, the stock is trading on a forward price-to-earnings (P/E) multiple of 37.4x for the year ending Dec. 2023. And for Dec. 2024, its multiple is lower at 29.1x.
This compares favorably with the company's 5-year historical multiple averages of 58.2x according to Morningstar and 65.77x according to Seeking Alpha. That makes it look cheap if one assumes the market will eventually reward the stock with a similar high multiple.
Subscriber and FCF Growth Underpins the Valuation
The truth is that it all depends on the company's subscriber growth rates. For example, last quarter its global streaming base grew 4.9% YoY to 232.5 million subscribers. That was also 0.75% higher than the prior quarter's 230.75 million.
That is exactly what investors are looking for in quarterly growth - no slowdown and steady upward progress. Moreover, Netflix now says it expects to generate $3.5 billion in free cash flow (FCF) for the year, up from $3.0 billion earlier.
At this rate, Netflix could reach $5 billion in FCF by 2024. Given the stock's $186.7 billion market valuation, that puts NFLX stock on a forward P/FCF multiple of 37.3x. This is why NFLX stock has been rising.
It also provides unique opportunities for short-put investors, who sell out-of-the-money (OTM) puts to generate income.
Selling Short OTM Puts for Income
For example, the $400 Strike price puts that expire on June 30, 20 days from now, trade at an attractive premium of $6.10 per put contract. That works out to a yield of 1.525% (i.e., $6.10/$400) for the short put investor who is willing to take a 20-day risk that the stock won't fall 4.77% from $420.02 to below $400.
In fact, the breakeven price is actually $393.90, which is 6.21% below today's price. It also works out to an annualized rate of return of 18.3% if the same trade can be done each month for a year.
This means that an investor who secures $40,000 in cash or securities with their brokerage firm can enter an order to “Sell to Open” 1 put option contract at $400. The account will immediately receive $610. And if the stock stays above $400 on or before June 30, the investor will not be obligated to use the $40,000 to purchase 100 shares at $400.00
For more risk-averse investors, the $395 strike price is also attractive. Since the premium is at $4.68, the short put investor will generate $468 on a cash investment of $39,500. that works out to a return of 1.18% for the next 20 days. On an annualized basis, that equals a return of 14.2%.
This shows that investors who own NFLX stock can also make good money in OTM NFLX stock puts as they wait for the stock to continue to move higher.
On the date of publication, Mark R. Hake, CFA did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
