Netflix: Are These Metrics New Hope for Investors?

With shares of Netflix (NASDAQ:NFLX) trading at around $139.80, 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:

netflixC = Catalyst for the Stock’s Movement

Yes, Netflix delivered a blowout quarter, but the biggest news was that the Internet video service added 2 million subscribers. You might be thinking that you have no interest in watching movies and TV shows online, but it’s only $8 per month. This is the key selling point for most subscribers. It also helps that Netflix is improving its content. As you might already know, Netflix has a licensing agreement with The Walt Disney Company (NYSE:DIS) for exclusive rights to new movies beginning in 2016. Netflix also has an interest in entering a licensing agreement with Sony Corporation (NYSE:SNE) for its latest movies, but that wouldn’t take place until after 2015, if at all, because of a deal that Sony has with Starz. Then there’s the show House of Cards, which will be available on Feb. 1. It stars Kevin Spacey and will be exclusive to Netflix’s video streaming service.

As far as Q4 results go, EPS came in at $0.13 versus an expectation of -$0.12. That was quite a surprise. At the same time, it’s nowhere near 2011 Q4 EPS of $0.64. Revenue also beat expectations, coming in at $945 million versus an expectation of $935 million. This is an improvement over last year’s Q4 revenue of $875.57 million. FY2012 EPS came in at $2.19, which was a big drop from 2011. On the other hand, revenue came in at $3.6 billion, which was a significant improvement from 2011.

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Investors were skeptical about CEO Reed Hastings and has strategies, but it looks like he’s getting the last laugh, at least for now. His aggressive spending and focus on compelling content is now paying off. He attributes much of this success to the popularity of tablets. Holiday tablet sales seem to have helped a great deal.

Everything might seem perfect for Netflix at the moment, but there are several threats to the company’s success. One of the biggest threats is the cost of content. Some economists feel that this will lead to the company’s demise. While content costs are a significant threat, it’s likely that Netflix will find a solution. Where there is demand and money to be made for everyone involved, solutions are often found.

Let’s take a look at some important numbers for Netflix.

E = Equity to Debt Ratio Is Normal

The debt-to-equity ratio and balance sheet for Netflix are both normal. It’s sad to say, but not many companies throughout the broader market sport a positive balance sheet. It’s nice to see.

Debt-To-Equity

Cash

Long-Term Debt

NFLX

0.56

$798.36 Million

$400.00 Million

AMZN

0.35

$5.25 Billion

$2.68 Billion

AAPL

0.00

$29.13 Billion

$0

 

T = Technicals on the Stock Chart Are Strong

Neflix has outperformed Amazon.com (NASDAQ:AMZN) and Apple Inc. (NASDAQ:AAPL) over the past three years, which is saying a lot.

1 Month

Year-To-Date

1 Year

3 Year

NFLX

47.80%

45.80%

43.68%

165.30%

AMZN

4.36%

6.87%

44.08%

120.80%

AAPL

-6.52%

-8.78%

14.59%

147.70%

 

At $139.80, Netflix is currently trading above all its averages.      

50-Day SMA

88.71

100-Day SMA

75.73

200-Day SMA

75.34

 

E = Earnings Have Been Steady

Earnings and revenue growth have been strong on an annual basis. The chart below doesn’t include results from 2012, which can be found in the Catalyst section.  

2007

2008

2009

2010

2011

Revenue ($)in billions

1.21

1.37

1.67

2.16

3.21

Diluted EPS ($)

0.97

1.32

1.98

2.96

4.16

 

We already know what happened this quarter. Now let’s take a look at previous quarters.

9/2011

12/2011

3/2012

6/2012

9/2012

Revenue ($)in millions

821.84

875.57

869.79

889.16

905.09

Diluted EPS ($)

1.16

0.63

-0.08

0.11

0.13

 

T = Trends Support the Industry

Online streaming video will continue to grow. Once more people figure out how to connect their Internet device to their TV, it will explode. Netflix is well-positioned.

Conclusion

Everything looks great for Netflix the business, but not everything looks great for Netflix the stock. While management is making all the right moves and the future is bright, the stock is ahead of itself. This is what happens when investors get excited and everyone piles into the stock because they don’t want to miss the boat. And this happens to be a very large boat. You might even call it the Titanic. Everyone will have a blast for a while, but with a Trailing P/E of 186.08, and a Forward P/E of 100.15, it’s only a matter of time before reality sets in. To play the long argument, the stock could run for an extended period of time before this happens. Just look at Amazon as an example.

Netflix will have a rocky road to prosperity. This is a company with a strong future, but this isn’t the ideal time to jump on the bandwagon. If you didn’t get in before the bell yesterday, then you missed it. Netflix is a WAIT AND SEE.

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