Can Netflix Continue This Bull Run?

With shares of Netflix (NASDAQ:NFLX) trading around $445, 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.

Netflix has agreed to pay Comcast (NASDAQ:CMCSA) to ensure the subscription service’s movies and TV shows stream seamlessly in a deal that underscores the power of distribution in the digital era — and could mean higher rates for consumers. The nation’s leading online video service and the largest U.S. provider of home Internet access said the agreement is designed to ensure that Netflix subscribers can watch the new season of House of Cards and other content free of the pauses and hiccups subscribers have reported in recent months. The agreement may pave the way for similar arrangements between Netflix and other Internet service providers, including Verizon (NYSE:VZ) and AT&T (NYSE:T). Consumer advocates and technology policy experts reacted with concern over the ability of giant Internet access providers to extract payment from businesses wishing to reach people in their homes — and the likelihood the extra costs eventually would be passed on to consumers.

Netflix and Comcast declined to reveal terms of their pact, which was announced Sunday. But Wedbush Securities analyst Michael Pachter predicted that the cost of Netflix’s new deal with Comcast will one day be felt by the streaming service’s 33 million U.S. subscribers. Comcast will “raise the price to whatever the market will bear,” Pachter said. “This will ultimately compel Netflix to raise prices to consumers.” Netflix declined to respond.

T = Technicals on the Stock Chart Are Strong

Netflix stock has been exploding higher in the last couple of years. The stock is currently trading near all time highs 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 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

36.11%

40%

38%

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

March Options

Flat

Average

April 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 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?

2013 Q4

2013 Q3

2013 Q2

2013 Q1

Earnings Growth (Y-O-Y)

491.17%

300%

345.45%

162.5%

Revenue Growth (Y-O-Y)

24.31%

22.2%

20.23%

17.72%

Earnings Reaction

16.47%

-9.14%

-4.46%

24.28%

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

21.18%

-12.00%

-0.69%

6.81%

4.82%

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 has agreed to pay Comcast to ensure the subscription service’s movies and TV shows stream seamlessly. The stock has been exploding higher 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.

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