Does Netflix Belong in Your Portfolio?

With shares of Netflix (NASDAQ:NFLX) trading around $382, 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.

“It’s been a good year for Netflix,” wrote CEO Reed Hastings and CFO David Wells in a letter to shareholders. “People around the world want what we offer: consumer-in-control Internet television.” Today, this seems to be the understatement of the century. As quick as an instant streaming download, Netflix shares skyrocketed more than 16 percent to around $388 in after hours trading — circling a high for the year — following the news the the video streaming phenomenon beat earnings expectations. The company reported full year net income of $112.4 million, crushing the Street’s call for $103.4 million. Earnings per share were $1.85, also well ahead of the the Wall Street consensus estimate. At $4.4 billion full-year revenue was in line with expectations. For the fourth-quarter, Netflix’s net income came in at $48.4 million, or 79 cents per share, beating the Streets $40.8 million and 66 cent estimates respectively. At $1.2 billion, revenue was also above expectations.

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 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

37.57%

30%

28%

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

February Options

Flat

Average

March 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 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)

491.32%

300.00%

345.45%

162.50%

Revenue Growth (Y-O-Y)

24.31%

22.20%

20.23%

17.72%

Earnings Reaction

14.52%*

-9.14%

-4.46%

24.48%

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.

* As of this writing

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

4.04%

1.07%

2.07%

-2.13%

2.26%

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’s shares skyrocketed more than 16 percent to around $388 in after hours trading. 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 relative year-to-date performance leader. Look for Netflix to OUTPERFORM.

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