Is Netflix a Buy?

With shares of Netflix (NASDAQ:NFLX) trading around $384, 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 has announced plans to expand into six European countries this year, introducing its online TV and movie streaming service to the French, German, and Swiss markets. The company, which created the popular House of Cards TV show, will also enter Austria, Belgium, and Luxembourg in late 2014, and will face different rules and competitors in each market. The online entertainment company will not have exclusive rights to its original show in all markets, as House of Cards has already been broadcast in Germany. Netflix will also have to face complex rules in France, where a film cannot be streamed on a subscription video service until three years after its release. But Netflix has some success competing in Europe, with more than 1.5m UK subscribers and 12.7 million users outside the United States. Details on programming and pricing in each country will be announced later, though in the UK, Netflix costs 5.99 pounds a month while a subscription in the Netherlands costs 8.99 euros (7.28 pounds) a month. The costs of launching in the new markets will keep Netflix’s international unit at a loss, the firm said in a letter to shareholders in April.

T = Technicals on the Stock Chart Are Mixed

Netflix stock has struggled to make significant progress over the last couple of months. However, the stock is currently surging higher and looks set 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 between its rising key averages which signal neutral 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

37.90%

0%

0%

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

Put IV Skew

Call IV Skew

June Options

Average

Average

July Options

Average

Average

As of today, there is an average demand from call and put buyers or sellers, all neutral over the next two months. To summarize, investors are buying a very small amount of call and put option contracts and are leaning neutral 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)

24.20%

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 = 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

4.17%

-23.70%

-1.65%

4.98%

-3.05%

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 announced plans to expand into six European countries this year. The stock has struggled to make significant progress over the last couple of months, but is currently surging higher. 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 year-to-date performance leader. Look for Netflix to OUTPERFORM.

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