Can Netflix Keep Growing?

With shares of Netflix (NASDAQ:NFLX) trading around $444, 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.

The Federal Communications Commission (FCC) wants details. The federal agency isn’t after the latest Orange Is the New Black spoiler; it wants the details of Netflix’s deals with Verizon (NYSE:VZ) and Comcast (NASDAQ:CMCSA). It also wants the details of all similar deals content providers make with Internet providers. The agency has jurisdiction over the “peering deals” as they are called. How Netflix paid Comcast so that Netflix would stream faster is a textbook example of one. Netflix and Verizon have a similar deal, but Verizon still remains one of the slowest ISPs for streaming Netflix so far. The terms of these and other peering deals have been kept secret from the public. Prompted by both of these recent deals, the FCC requested information about Netflix’s two deals and that of other peering deals.

As FCC Chair Tim Wheeler mentions the three companies by name in the news release, it’s pretty obvious that it sparked the federal interest. Wheeler said: “To be clear, what we are doing right now is collecting information, not regulating. We are looking under the hood,” said Wheeler in the release. “Consumers want transparency. They want answers. And so do I.” Google, Microsoft, Apple, Amazon, and Facebook have also made similar deals with Internet providers, reported The Huffington Post. As with Netflix’s two deals, the terms of these deals have not been made known to the general public. At the heart of this issue — although it is not mentioned by name — is net neutrality, the concept that all online data should be treated equally.

When a federal appeals court struck down the FCC’s Open Internet laws in early 2014, it set the stage for companies to start charging for Internet service in tiers based on quality and usage. Netflix has both advocated for stronger net neutrality rules and made these peering deals in an attempt to keep its service running as smoothly as possible. Netflix representatives have also met with the FCC about net neutrality. So far, the FCC has said that companies cannot deliberately degrade or otherwise slow an Internet connection, although it can offer an upgraded version of the service. The FCC has also proposed new rules that are currently in the public comment period. Many net neutrality advocates have called out Wheeler and the FCC for not doing enough to preserve net neutrality. Others have even declared it dead.

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 all time highs and looks poised to continue. 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 signal neutral to bullish price action in the near-term.

NFLX

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

34.44%

6%

3%

What does this mean? This means that investors or traders are buying a small 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 today, 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 small 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)

1,620.00%

491.17%

300%

345.45%

Revenue Growth (Y-O-Y)

24.20%

24.31%

22.2%

20.23%

Earnings Reaction

7.0%

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), Outerwall (NASDAQ:OUTR), and sector?

Netflix

Amazon

Comcast

Outerwall

Sector

Year-to-Date Return

20.20%

-18.10%

0.32%

-2.82%

-1.10%

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 Federal Communications Commission wants the details of Netflix’s deals with Verizon and Comcast. The stock has been moving higher over the last couple of months and is currently trading near all time highs. 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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