Is Netflix a Buy at All-Time Highs?

With shares of Netflix (NASDAQ:NFLX) trading around $307, 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 users of Virgin Media’s (NASDAQ:VMED) set-top boxes will now have access to Netflix through their TV setup, making it the first time that a major Pay-TV operator embeds the beloved streaming service within its programming menu. The program will soon be available to 1.7 million Virgin Media homes this year, beginning with a pilot launch to 40,000 homes this week, the Wall Street Journal reports.

Also, Netflix seems to have finally recovered from difficulties the company faced in 2011 when Chief Executive Officer Reed Hastings decided to separate the company’s streaming and DVD-renting options into separate subscription plans, angering customers and causing the stock to plummet.

T = Technicals on the Stock Chart Are Strong

Netflix stock has seen a consistent uptrend over the last several years. The stock has just recently made all-time highs and looks poised to continue higher. 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

42.18%

50%

49%

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

October Options

Flat

Average

November 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 Q2

2013 Q1

2012 Q4

2012 Q3

Earnings Growth (Y-O-Y)

345.45%

162.50%

-78.96%

-88.79%

Revenue Growth (Y-O-Y)

20.23%

17.72%

7.96%

10.13%

Earnings Reaction

-4.46%

24.28%

42.22%

-11.87%

Netflix has seen improving earnings and revenue figures over the last four quarters. From these numbers, the markets have had mixed feelings 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), Outerwall (NASDAQ:OUTR), and sector?

Netflix

Amazon

Comcast

Outerwall

Sector

Year-to-Date Return

232.20%

19.52%

16.27%

11.98%

21.72%

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 just recovered from a slump suffered in recent years and has also sealed a deal with Virgin Media that will increase its exposure. The stock is now trading at all-time high prices and looks poised to continue. Over the last four quarters, earnings and revenues have been improving, however, investors have had mixed feelings. Relative to its peers and sector, Netflix has been a year-to-date performance leader. Look for Netflix to continue to OUTPERFORM.

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