Netflix traded significantly higher in the after hours following the release of its earnings report. The one item that really stood out for me was the EPS. Despite a revenue number that was basically in line they were able to report an EPS significantly higher than expected. And more importantly they guided the EPS much higher for next quarter. What this says to me is despite the fact that they are spending more and more on content that they are keeping costs under control and it is flowing to their bottom line. So when they say on their call that they believe they can get US “contribution margin” to 40% it is easier for investors to believe. At the same time there has been an acceleration of international growth and Netflix didn’t dissuade investors from the notion that perhaps they can achieve comparable margins internationally.

So those are my key “fundamental” takeaways from their earnings report and Q&A with investors. Now for the trading part. A few weeks ago NFLX largest shareholder, Carl Icahn, stated that he liquidated his remaining shares. The stock took an 8% hit the next few days but then recovered coming into today’s earnings report. In the past week several major banks came out with price targets 10-15% above where NFLX was trading. This emboldened traders to push NFLX to a new all time this week prior today’s Q2 earning’s release.

As the earnings were released just after market Close NFLX ticked lower to $95 then quickly reversed to $103. It appears that initially the earnings numbers were only available on their website, which prevented many investors from placing trades. As the report was more widely disseminated NFLX powered above 103 up to 108. For the remainder of the after hours market it didn’t move much below or above 108.

In my prior blog post on NFLX I talked about a measured move to 103-04 then a good shorting opportunity following the earnings release as other large holders would use a good report as an opportunity to take profits. I believe that the dynamic may have changed because of the Q2 report. So although I will still look for some initial profit taking in the pre-market and right when the market opens. I am now prepared to trade NFLX for another leg higher, which could land it around 114-115.

From a longer term perspective I am mindful that many momentum hedge funds are now probably targeting 120-125 per share in the medium term, and if enough analysts raise their targets to that area it could help fuel the final run up. If you look at the long term chart below NFLX spent more than 18 months consolidating prior to its breakout following its Q1 earnings report.  This long consolidation combined with an 8% short interest may give it enough fuel for one more large leg higher before beginning another long term consolidation.

I will definitely factor in pre-market price action to my short term trading plan as volume should begin to flow in after 8:00AM. 110 figures to be an interesting level as all whole numbers divisible by 10 tend to attract large institutional orders (the human brain is quirky like that). A discussion of these factors as well as an updated trading plan will be part of the pre-market meeting. Good night and good luck!

Steven Spencer is the co-founder of SMB Capital and SMB University which provides trading education in stocks, and options. He has traded professionally for 19 years. His email address is: [email protected].

Steven Spencer is currently long and short NFLX put options