Why Is Netflix So Volatile?

Aron Pinson was recently a weekly guest on #PreMarket Prep, a daily trading idea radio show hosted by Joel Elconin and Dennis Dick.

Aron Pinson, Chief Investment Officer at LPS Financial and MicroFundy blog author, discussed several stocks on the program. Among them, he looked into Netflix, Inc. NFLX scheduled to report earnings on Wednesday.

The analyst explained why the stock is so volatile, as he believes this is "the key factor to focus on."

To illustrate the point, he provided some numbers:

"During a four-month stretch in 2011, Netflix was down about 80 percent. In 2013, it was the best performing stock in the S&P 500, up over 250 percent. And then, during last year, there was one period between March and May that the stock was down about 35 percent, there was a mid-year rally of over 60 percent, and then, towards the end of the year, another 35 percent decline. And, so far this year, Netflix is the third best performing stock in the S&P 500.

"So to see Netflix up over 40 percent year to date is something you want to look at, and really try to understand why it is so volatile."

Related Link: What 5 Top Netflix Analysts Are Saying Before Earnings

Pinson went on to explain, “Netflix is really the epitome of leverage. There is not only financial leverage (…) but, first and foremost, there is the operating leverage of their business model."

Pinson concluded, "To keep a long story short, when you look at the actual tangible balance sheet of the company, you are talking about $1.6 billion in cash, only $2.6 billion in tangible assets, and they have over $11 billion of real liabilities, when you count the content liabilities, and count all the other liabilities as well. So not only do you have the operating leverage from their business model; then, of course, you have the financial leverage. And combine those two together, there is no wonder why stock is so volatile."

Listen to the full interview below: