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Netflix (NFLX) stock is well off its highs, down to where it was at the end of May. This is attracting value buyers in NFLX, especially given its strong free cash flow (FCF) generation. In addition, short sellers options like the stock's high put premiums. These high premiums make them worth shorting for income.
As of morning trading on Friday, Sept. 15, NFLX stock was below $400 per share ($397.53). That is where it was trading on May 31, when it closed at $395.23. Moreover, it's now down over $80 from its peak of $477.59 on July 19, off 16.8%.
Free Cash Flow (FCF) and Buybacks Are Strong
This is despite the fact that Netflix reported solid positive free cash flow (FCF) at the end of Q2. It generated $1.339 billion in FCF for the quarter. This was a significant result as a year ago its FCF was negative. In fact, for the first half of 2023, it has generated over $3.46 billion in FCF.
Moreover, its revenue in the past 6 months was $16.348 billion. That means that its FCF margin was high at 21.1%. This implies that over 21% of every sales dollar goes straight to the bank account, with no cash expenses, capex, or even working capital requirements.
This allows the company to buy back its shares and pay down its debt. For example, during Q2, Netflix bought back 1.8M shares for $645 million; for the past 2 quarters, it has spent over $1 billion in share repurchases.
In fact, the company said it expects to increase its buyback activity. It has $3.4B of capacity remaining under its $5B share buyback authorization. This means that at today's market cap of $176 billion, it can buy back 1.93% of its shares (i.e., $3.4 billion / $176 billion).
That is a high buyback yield and could help make a flow for the stock and eventually push it higher.
Shorting OTM Puts for Income
Given the stock's recent precipitous drop, its put option premiums have risen. That makes it ideal to sell short out-of-the-money (OTM) puts to gain extra income.
For example, the Sept. 29 put option chain, which expires in two weeks, shows that the $380 strike price puts trade for $3.33. Moreover, the $385 strike price puts trade for $4.55.
The $380 strike price is almost 5% below today's price, so it is OTM by a good amount, providing downside protection to short sellers.
Moreover, the immediate yield is 0.876% (i.e., $3.33/$380). And the $385 strike price puts have a 1.18% yield (i.e., $4.55/$385).
This is ideal for short put traders since if these plays can repeated on an annualized basis the returns are high.
For example, the $380 strike price yield of 0.876% works out to an annualized return of 22.8% if it can be repeated every two weeks. In addition, the $385 strike price yield of 1.18% produces a 30% annualized return if repeated every 2 weeks.
The bottom line NFLX stock could be near the bottom, especially given the company's strong fundamentals and buyback program. As a result, it makes sense for existing shareholders to sell short the high put option premiums to make extra income.
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.
