Does Netflix Have Further Upside to Go?

With shares of Netflix (NASDAQ:NFLX) trading around $305, 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’s original show House of Cards won an Emmy for best director recently. David Finch’s victory confirmed that Hollywood is ready to take Netflix, and other online streaming television, seriously. The Wall Street Journal said that the win will encourage writers, actors, and producers to consider creating original programming for Netflix as a respectable avenue for their projects. Broadcast TV and cable networks like CBS (NYSE:CBS)-owned Showtime and Time Warner (NYSE:TWX)-owned HBO also performed well at television’s biggest awards show.

T = Technicals on the Stock Chart Are Strong

Netflix stock has been on an explosive run throughout most of the last several quarters. The stock is now trading near all-time highs and looks ready to tackle new prices. 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

47.20%

96%

95%

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

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 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 Mixed 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 mixed earnings and rising revenue figures over the last four quarters. From these numbers, the markets have had conflicting 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

230.70%

25.20%

18.20%

-8.38%

26.49%

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. House of Cards, a Netflix original show, won an Emmy for best director over the weekend, a first for a web series. The stock has been exploding much higher in recent months and is now trading near all time high prices. Over the last four quarters, earnings have been mixed while revenues have been rising, which has produced conflicting feelings among investors. 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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