Earnings Preview: International Business Machines Corp. and Netflix, Inc.

International Business Machines Corp. (IBM) and Netflix, Inc. (NFLX) will report quarterly earnings after the close on Monday

by Kirra Fedyszyn

Published on Jul 15, 2016 at 11:09 AM

Earnings season is now underway, and next week's schedule will really begin to heat up, with several blue-chip names set to reveal quarterly figures. It begins with tech giant International Business Machines Corp. (NYSE:IBM), which will report after the close on Monday. Also stepping into the earnings confessional Monday evening is streaming media stock Netflix, Inc. (NASDAQ:NFLX). Below we'll take the pre-earnings temperature of IBM and NFLX at the end of a huge week for U.S. markets.

IBM has added 15.5% in 2016, and hit a year-to-date high on Thursday, following several bounces off its 200-day moving average in recent months. The stock has been trekking higher in July so far, repeating a historical pattern. But today, the shares are 0.8% lower at $159.00, after Barclay raised its price target to $140 from $125 -- still a discount to current levels. Overall, analysts have maintained a cautious outlook, with 11 out of 18 rating IBM a "hold" or worse.

Traders, meanwhile, have been somewhat more optimistic of late. Short interest represents just 2.3% of IBM's float, and is near annual lows. Plus, options traders have been picking up calls in recent weeks. IBM's 10-day call/put volume ratio of 1.31 at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) sits higher than 63% of the past year's readings, and at its highest level since early May.

The options market is currently pricing in a one-day post-earnings move of 5.4% for International Business Machines Corp. (NYSE:IBM) -- slightly wider than the 4.2% average swing over the past eight quarters. Though the stock has made a move to the downside in the session following earnings for the past seven quarters in a row, today's traders seem to be targeting a positive move. IBM calls are trading at three times their average intraday rate. The action is punctuated by a long call spread at the August 165 and 170 strikes, and buy-to-open activity also looks to be happening at the weekly 7/22 160-strike call.

NFLX has never fully recovered from its post-earnings plummet in mid-April, when the stock sunk 13% in a single session. The shares are off 14.5% year-to-date, and have been struggling with resistance at their 160-day moving average. Today, NFLX is down 0.3% at $97.73.

The stock has seen a slew of negative analyst notes in recent weeks, yet 16 out of 27 brokerage firms still maintain a "buy" or better rating, and the average 12-month price target of $116.39 sits at a healthy premium to current levels. Should Monday's earnings miss analyst estimates, a further round of bearish attention could put pressure on the shares.

Traders are largely in NFLX's bullish corner, despite the stock's recent troubles. While more than 8% of the equity's float is wrapped up in short interest, these pessimistic bets fell by about 13% during the two most recent reporting periods. And call buying has been a popular strategy in NFLX's options pits, per the stock's 10-day ISE/CBOE/PHLX call/put volume ratio of 1.47 -- in the 86th percentile of its annual range.

NFLX has historically made some hefty moves in the session immediately following its earnings report -- 12.4% on average, over the past eight quarters. Options traders' expectations appear to be right in line, pricing in a 12.4% swing for Tuesday. The stock's options are crossing at below-average rates at midday, with calls leading puts. But most are paying no mind to earnings, with the July series -- which expires at tonight's close -- accounting for all 10 of the most active options.

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