Can Netflix’s Stock Rebound?

With shares of Netflix (NASDAQ:NFLX) trading around $304, 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.

Some lucky cable subscribers will soon be able to watch Orange is the New Black and other Netflix television content on their TVs without attaching a computer, gaming console, or Roku first. NBC reports that about 700,000 cable subscribers will be affected by Netflix’s deal with three cable companies: CN Communications, Atlantic Broadband, and Grande Communications. This is the first time that Netflix has made a deal like this one in the United States. It has similar distribution deals it made last year in the United Kingdom and in Sweden, suggesting that Netflix won’t be killing off cable service quite yet. Instead, it can have a symbiotic relationship with cable services through a TiVo DVR in the meantime. Bloomberg reports that customers in Texas, Chicago, and the Eastern United States who want Netflix will have to pay for it as an additional fee to their cable bill, similar to how users pay additional fees for more movie channels or for pay-per-view.

T = Technicals on the Stock Chart Are Mixed

Netflix stock has been exploding higher in the last couple of years. However, the stock is currently trading near lows for the year as it continues to pull back. 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 below its rising key averages which signal neutral to bearish 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

49.99%

43%

40%

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

May Options

Steep

Average

June Options

Steep

Average

As of today, there is an average demand from call buyers or sellers and high demand by put buyers or low demand by put sellers, all neutral to bearish over the next two months. To summarize, investors are buying a minimal amount of call and put option contracts and are leaning neutral to bearish 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?

2014 Q1

2013 Q4

2013 Q3

2013 Q2

Earnings Growth (Y-O-Y)

1,620.00%

491.17%

300%

345.45%

Revenue Growth (Y-O-Y)

24.02%

24.31%

22.2%

20.23%

Earnings Reaction

7.0%

16.47%

-9.14%

-4.46%

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 = Average 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

-17.80%

-27.40%

-1.82%

2.57%

-9.47%

Netflix has been an average performer, year-to-date.

Conclusion

Netflix is a streaming service that provides video entertainment to consumers in the United States. Some lucky cable subscribers will soon be able to watch Netflix television content on their TVs without attaching a computer, gaming console, or Roku first. The stock has been exploding higher, but is currently pulling back. 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 an average year-to-date performer. WAIT AND SEE what Netflix does this quarter.

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