Where Will Netflix Go After Earnings?

With shares of Netflix (NASDAQ:NFLX) trading around $335, 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 reported earnings after the closing bell on Monday that were even better than expected. Earnings came in at 52 cents a share and revenue grew 22 percent to $1.1 billion. Netflix has reached its goal of beating the number of subscribers of Time Warner’s (NYSE:TWX) HBO, reaching 31.09 million customers versus HBO’s 28.7 million. Netflix said it expects to add 6 million customers this year and in 2014. Netflix also said that its newest original show Orange is the New Black has been a critical and popular success, and the service has launched in Holland.

T = Technicals on the Stock Chart Are Strong

Netflix stock has been exploding higher in the last several years. The stock is currently pulling-back from all time high prices after releasing earnings on Tuesday afternoon. 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

51.83%

43%

41%

What does this mean? This means that investors or traders are buying a very significant amount of call and put options contracts as compared to the last 30 and 90 trading days.

Put IV Skew

Call IV Skew

November Options

Flat

Average

December 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 very 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 Q3

2013 Q2

2013 Q1

2012 Q4

Earnings Growth (Y-O-Y)

300.00%

345.45%

162.50%

-78.96%

Revenue Growth (Y-O-Y)

22.20%

20.23%

17.72%

7.96%

Earnings Reaction

-5.50%*

-4.46%

24.28%

42.22%

Netflix has seen increasing earnings and revenue figures over the last four quarters. From these numbers, the markets have had mixed feelings about 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

266.60%

32.26%

27.03%

21.05%

87.73%

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

Conclusion

Netflix is a streaming services that provides video entertainment to consumers in the United States. A recent earnings report has investors confused about the company. The stock has been exploding higher and is currently trading near all time high prices. Over the last four quarters, earnings and revenues have been rising which has produced mixed feelings among investors. Relative to its peers and sector, Netflix has been a year-to-date performance leader. Look for Netflix to OUTPERFORM.

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