With shares of Netflix (NASDAQ:NFLX) now trading at $77.60, is the online video service company a BUY, a WAIT and SEE, or a STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:
C = Catalyst for the Stock’s Movement
Netflix shares were on a spike on Wednesday, rising more than 13 percent after investor Carl Icahn declared that he had bought a 9.98 percent stake in the company because it was ripe to be acquired. There have previously been reports of Microsoft (NASDAQ:MSFT) considering a bid and Amazon.com (NASDAQ:AMZN) is also a possible player. Icahn said in a filing with the U.S. Securities and Exchange Commission that he bought the shares because the stock was undervalued given the company’s “dominant market position and international growth prospects,” while adding that it could offer “significant strategic value for a variety of significantly larger companies that are engaging in more direct competition with one another due the evolution of the Internet, mobile and traditional industry.”
Shares dropped last week after Netflix announced that the 1.16 million new U.S. customer signups in the September quarter were fewer than expected by analysts. As a result, the company was forced to also cut its domestic growth outlook for the year to 5.4 million subscribers from an earlier forecast of 7 million.
Netflix, a stock market favorite just over a year ago, dug its own proverbial grave when it announced a new pricing structure that forced split customers between those subscribing to the DVD service and those streaming video online. The stock fell 61 percent in 2011 from being in the vicinity of $300 after customers decamped en masse. Now facing new rivalries and the challenges of a changing technology, Netflix is still working on achieving stability while coming up with alternative business ideas quickly.
“Streaming growth is slowing to a crawl, while their DVD business is generating 90 percent of all profit — and that’s declining super fast,” Wedbush Securities analyst Michael Pachter, who has an underperform rating on the stock, told Bloomberg.
H = High Quality Pipeline
To spur its subscriber growth, Netflix is beginning to offer original programming instead of just content from provider partners. Earlier this year, it streamed the show Lilyhammer and has lined up House of Cards from Academy Award-nominated director David Fincher for next year. It is also set to receive the return of the highly successful show Arrested Development in 2013. The company is also beginning to grow abroad, reaching several markets in Scandinavia last week, but is being forced to pour domestic earnings into its international expansion. That could prove costly, at least at the outset.
T = Technicals on the Stock Chart are Weak
As of October 23, 2012, the stock price is 8.14 percent above its 20 Day Simple Moving Average; 11.40 percent above the 50 Day SMA; and 17.91 percent below the 200 Day SMA. Since the beginning of 2012, the stock price has been in a downward trend and is down 1.54 percent year-to-date and down 41.71 percent year-over-year.
E = Earnings Are Increasing Quarter over Quarter
Netflix’s earnings have been uncertain over the last few quarters, and while the most recent quarterly number of 13 cents a share showed a slight increase from the previous quarter’s 11 cents a share, it was a significant fall from the year-over-year EPS of $1.16.
Since earnings are not increasing quarter-over-quarter, the stock is a little too high for our risk profile.
T = Trends Support the Industry in which the Company Operates
Netflix is part of an industry that has found itself at a technological crossroads. The DVD business, a high-profit sector that was surging just a few years ago has suddenly seen its growth come to a screeching halt. Online streaming and seamless content sharing on several devices is increasingly the preference for more and more consumers, and most players in the industry are trying to make the switch as quickly as possible. While Netflix has certainly stumbled more than its fair share, the company has taken remedial steps as well. New investments will take their time to become profitable, but Netflix’s long-term success will depend on how quickly the company becomes attractive to domestic paying subscribers again.
“Netflix remains a ‘show-me’ story in the back half of 2012,” JPMorgan analyst Douglas Anmuth wrote in a research note last week. “Competition from Amazon, Hulu (NASDAQ:CMCSA) and TV Everywhere continues to increase.”
Still, it is not easy to dismiss Netflix, which was seeing big highs last year and certainly holds the potential to get back there if it plays its cards in the coming few months right.
Netflix looks like a WAIT AND SEE as what could be more underperformance based on the key metrics above.
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