Netflix (NASDAQ:NFLX) stock has seen a significant drop from its highs, trading at levels last seen in May. This decline has caught the attention of value buyers who see potential in the stock, especially considering Netflix’s strong free cash flow (FCF) generation. Additionally, short-put traders are finding opportunities due to the elevated put premiums, making it an attractive income-generating strategy.
As of September 15, NFLX stock was trading below $400 per share, which is where it stood at the end of May. The stock has dropped over $80 from its peak of $477.59 on July 19, representing a 16.8% decline.
Strong Free Cash Flow and Buybacks
Despite the stock’s decline, Netflix reported robust positive free cash flow (FCF) at the end of Q2, generating $1.339 billion in FCF for the quarter. This marks a significant improvement compared to negative FCF a year ago. Over the first half of 2023, the company generated over $3.46 billion in FCF.
Netflix’s FCF margin stands at a healthy 21.1%, indicating that more than 21% of every dollar in revenue goes directly to its bank account without cash expenses, capital expenditures, or working capital requirements. This strong FCF generation enables the company to buy back shares and reduce its debt. In Q2, Netflix repurchased 1.8 million shares for $645 million, and over the past two quarters, it has spent over $1 billion on share repurchases.
The company has expressed its intention to increase its buyback activity and has $3.4 billion in capacity remaining under its $5 billion share buyback authorization. This represents a buyback yield of approximately 1.93% of its current market capitalization, potentially driving demand for the stock.
Shorting Out-of-the-Money (OTM) Puts for Income
The recent drop in NFLX stock has led to higher put option premiums, creating an opportunity for short sellers to generate income by selling OTM puts. For example, the put option chain expiring on September 29 offers premiums for the $380 strike price puts at $3.33 and for the $385 strike price puts at $4.55.
The $380 strike price puts are nearly 5% below the current stock price, providing downside protection for short sellers. The immediate yields for these puts are 0.876% and 1.18%, respectively.
Short-put traders can potentially achieve high annualized returns by repeatedly executing these trades. The 0.876% yield on the $380 strike price puts translates to an annualized return of 22.8% if repeated every two weeks. Similarly, the 1.18% yield on the $385 strike price puts results in a 30% annualized return with the same frequency.
Final Thought
Netflix’s stock decline has attracted both value buyers and short-put traders. The company’s strong fundamentals, FCF generation, and buyback program suggest that the stock may be near the bottom. Existing shareholders can consider selling short-put options with elevated premiums to generate additional income.
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