Is Netflix A Buy Now?

With shares of Netflix (NASDAQ:NFLX) trading around $163.37, 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 streaming 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, and in the United States, subscribers can also receive DVDs delivered to their homes. It obtains content from various studios and other content providers through fixed-fee licenses, revenue sharing agreements and direct purchases. Netflix operates in three segments: Domestic streaming, International streaming and Domestic DVD. Through its segments, Netflix is able to reach a growing consumer base as these forms of entertainment continues to be widely adopted.

T = Technicals on the Stock Chart are Mixed

After the Financial Crisis, Netflix stock saw a significant rise that made it one of the market leaders. Since then, the stock has experienced its fair share of volatility, positive and negative. 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 around its key averages which signal neutral price action in the near-term.

NFLX

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(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

82.45%

83%

85%

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

Put IV Skew

Call IV Skew

May Options

Steep

Average

June Options

Steep

Average

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

2012 Q4

2012 Q3

2012 Q2

2012 Q1

Earnings Growth (Y-O-Y)

-79.37%

-88.79%

-91.27%

-107.21%

Revenue Growth (Y-O-Y)

7.96%

10.13%

12.75%

21.05%

Earnings Reaction

42.22%

-11.87%

-25.01%

-13.9%

Netflix has seen increasing revenue figures but is still working on its earnings growth. From these figures, the markets have been very pleased with Netflix’s most recent earnings announcement which may be a catalyst for a bullish run during the rest of the quarter.

P = Excellent Relative Performance Versus Peers and Sector

How has Netflix stock done relative to its peers, Amazon (NASDAQ:AMZN), Time Warner (NYSE:TWX), Comcast (NASDAQ:CMCSA), and sector?

Netflix

Amazon

Time Warner

Comcast

Sector

Year-to-Date Return

81.57%

4.05%

22.79%

7.31%

12.29%

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

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Conclusion

Netflix provides provides an entertainment service that is sweeping across the nation. As the Internet continues to increase its rank as a service medium, Netflix stands to profit. The stock has been major gains in recent years, has suffered a setback, but is now attempting to be where it once was. Earnings and revenue figures are a bit confusing but investors are really excited about the recent earnings report, a positive catalyst for the stock. Relative to its peers and sector, Netflix has left them in the dust in terms of year-to-date performance. Look for Netflix to continue to OUTPERFORM.

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