Will Netflix Surge Higher On the Dreamworks Deal?

With shares of Netflix (NASDAQ:NFLX) trading around $229, 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. A recent deal with Dreamworks (NASDAQ:DWA) is fueling demand for Netflix stock as the streaming service is ramping-up its original programming menu with popular choices from the maker of Shrek, Madagascar, and Kung Fu Panda. Netflix has revolutionized the television and movie industry with its services. Consumers in the United States and around the world look to access their favorite shows and movies via Internet mediums at increasing rates. Look for Netflix’s increasing popularity to lead it to rising profits.

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T = Technicals on the Stock Chart are Strong

Netflix stock has seen an explosive run in its stock after seeing a mediocre last two years. The stock continues to plow higher and looks set to test previous all-time highs in the near future. 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

45.78%

56%

55%

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

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 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?

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2013 Q1

2012 Q4

2012 Q3

2012 Q2

Earnings Growth (Y-O-Y)

162.50%

-78.96%

-88.79%

-91.27%

Revenue Growth (Y-O-Y)

17.72%

7.96%

10.13%

12.75%

Earnings Reaction

24.28%

42.22%

-11.87%

-25.01%

Netflix has seen mixed earnings and increasing revenue figures over the last four quarters. From these numbers, the markets are getting excited about 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), Coinstar (NASDAQ:CSTR), and sector?

Netflix

Amazon

Comcast

Coinstar

Sector

Year-to-Date Return

148.81%

11.44%

7.84%

13.98%

7.31%

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

Conclusion

Netflix offer entertainment services highly valued by a growing user base. A recent deal with Dreamworks has investors flocking to the stock. The stock has displayed an explosive move this year that does not show any signs of slowing. Over the last four quarters, earnings have been mixed while revenue figures have been rising which have really made investors excited about the company. Relative to its peers and sector, Netflix has blown them out of the water and has led in year-to-date performance. Look for Netflix to continue to OUTPERFORM.

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