Will Netflix Move Higher?

With shares of Netflix (NASDAQ:NFLX) trading around $443, is NFLX an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock’s Movement

Netflix is an Internet subscription service that streams television shows and movies. The company’s subscribers can watch unlimited television shows and movies streamed over the Internet to their televisions, computers, and mobile devices. In the United States, subscribers can also receive DVDs delivered to their homes. Netflix has revolutionized the television and movie industry with its services.

Given recent news from across the Atlantic, it looks like Netflix is getting serious about its European expansion efforts. A report in the German news magazine Manager suggests Netflix is in advanced talks with Deutsche Telekom AG regarding a collaboration before Netflix’s planned solo launch in Germany this fall. In addition to Germany, Netflix has already announced plans to launch its streaming service in Austria, Switzerland, France, Belgium, and Luxembourg later this year. The report quotes anonymous inside sources as saying Deutsche Telekom AG was open to cooperating with Netflix even though the streaming titan’s VoD service would be a direct competitor with Telekom’s on-demand video service.

T = Technicals on the Stock Chart Are Strong

Netflix stock has been moving higher over the last couple of months. The stock is currently trading near highs for the year and looks set to continue this path. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, Netflix is trading above its rising key averages, which signals neutral to bullish price action in the near-term.

Source: Thinkorswim

Taking a look at the implied volatility (red) and implied volatility skew levels of Netflix options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

Netflix options

38.51%

66%

64%

What does this mean? This means that investors or traders are buying a significant amount of call and put options contracts, as compared to the last 30 and 90 trading days.

Put IV Skew

Call IV Skew

July Options

Flat

Average

August Options

Flat

Average

As of Tuesday, there is an average demand from call buyers or sellers and low demand by put buyers or high demand by put sellers, all neutral to bullish over the next two months. To summarize, investors are buying a significant amount of call and put option contracts and are leaning neutral to bullish over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion.

E = Earnings Are Increasing Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on Netflix’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for Netflix look like and more importantly, how did the markets like these numbers?

2014 Q1

2013 Q4

2013 Q3

2013 Q2

Earnings Growth (Y-O-Y)

1,620%

491.17%

300%

345.45%

Revenue Growth (Y-O-Y)

24.2%

24.31%

22.2%

20.23%

Earnings Reaction

7%

16.47%

-9.14%

-4.46%

Netflix has seen increasing earnings and revenue figures over the last four quarters. From these numbers, the markets have been pleased with Netflix’s recent earnings announcements.

P = Excellent Relative Performance Versus Peers and Sector

How has Netflix stock done relative to its peers – Amazon (NASDAQ:AMZN), Comcast (NASDAQ:CMCSA), and Outerwall (NASDAQ:OUTR) — and sector?

Netflix

Amazon

Comcast

Outerwall

Sector

Year-to-Date Return

20.54%

-18.20%

1.74%

-11%

-2.73%

Netflix has been a relative performance leader, year-to-date.

Conclusion

Netflix is a streaming service that provides video entertainment to consumers in the United States. The company is in advanced talks with Deutsche Telekom AG regarding a collaboration before Netflix’s planned solo launch in Germany this fall. The stock has been moving higher over the last couple of months and is currently trading near highs for the year. Over the last four quarters, earnings and revenues have been rising, which has left investors pleased. Relative to its peers and sector, Netflix has been a year-to-date performance leader. Look for Netflix to OUTPERFORM.

Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

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