Should You Consider Netflix in Your Portfolio?

With shares of Netflix (NASDAQ:NFLX) trading around $434, 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 at the moment remains unaffected by the end of net neutrality, according to a note from JPMorgan (NYSE:JPM) analyst Doug Anmuth seen by Re/Code. “Netflix does not seem overly concerned regarding Net Neutrality, and continues to believe that violations would be escalated quickly. Netflix also indicated that it has no evidence or belief that its service is being throttled,” Anmuth says in the note. FCC Chair Tom Wheeler has said that the regulator remains dedicated to the principles of net neutrality and that the agency will appeal the ruling.

The rules were put in place by the FCC to make sure the Internet would remain a fair place for everyone, with no companies receiving preferential treatment or being unfairly blocked by Internet providers. Netflix has argued for net neutrality, saying that wireless broadband customers pay for access to services like Netflix and that if providers like Verizon begin slowing Netflix’s service, then a battle will escalate quickly and likely result in customers switching to a different Internet provider.

T = Technicals on the Stock Chart Are Strong

Netflix stock has been exploding higher in the last several years. 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 signals 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

33.47%

0%

0%

What does this mean? This means that investors or traders are buying a minimal 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 Friday, there is 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 minimal 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), and Outerwall (NASDAQ:OUTR) — and sector?

Netflix

Amazon

Comcast

Outerwal

Sector

Year-to-Date Return

17.74%

-10.6%

3.09%

7.46%

5.42%

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 at the moment remains unaffected by the end of net neutrality. 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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