Netflix woes setting up for a Hollywood ending, says trader Mike Khouw

Netflix's stock price may have lost the plot, but its fundamental narrative remains intact. Trading at 18.9x forward earnings — down near its 2022 bear-market trough (<15x) — the stock has gotten cheaper while the underlying business has gotten better. The Highlights - Valuation: 18.9x forward earnings vs. <15x at the 2022 trough. - Ad Growth: ~$3 billion expected this year, scaling toward a potential $10 billion by 2030. - Option Setup: >1.5% standstill return over 25 days (>20% annualized) via a defined-risk covered strangle. The Investment Case When Netflix stopped highlighting subscriber adds to focus on revenue, margins, and free cash flow, growth investors departed — and value investors haven't fully arrived because legacy media like Disney (<13x) looks cheaper on paper. However, Netflix is a far superior business: - Monetization Engine: With ~325 million paying members, Netflix offers connected TV advertisers the cleanest audience at scale. The default ad tier creates a line of sight to $10 billion in ad revenue by 2030. - Capital Discipline & AI: Management is aggressively buying back stock rather than overpaying for legacy studio assets. Meanwhile, generative AI is a net positive: it reduces production, dubbing, and localization costs — a direct boost to margins for a company whose biggest expense is content amortization. - Engagement: Live sports, spectacles, and AI-driven personalization directly target flatlining view times to protect pricing power. Paying 18.9x for today's higher-margin, cash-generative Netflix is only four turns above the worst moment in its public history. That makes selling volatility far more attractive than buying shares outright. The Trade: August 65/78/88 "Covered Strangle" With Netflix around $70 and 25 calendar days to August expiration: - Sell the August 65 Put and August 78 Call. - Buy the August 88 Call (upside tail hedge). - Net Credit: $1.10 (~1.5% yield in 25 days, or >20% annualized). Risk Profile: - Profitable Range: $63.90 to $79.10 (brackets ~9% downside and ~13% upside). - Upside Risk: Capped at 10 points by the August 88 call. - Downside Risk: If assigned below $65, your effective entry is $63.90 (~17x forward earnings)—a compelling entry price near 2022 valuation lows.