Is Netflix a Safe Investment?

With shares of Netflix (NASDAQ:NFLX) trading around $376, 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 CEO Reed Hastings strongly criticized major ISPs like AT&T (NYSE:T), Comcast (NASDAQ:CMCSA), and Verizon (NYSE:VZ) over their alleged anti-net neutrality behavior in a recent post on the video streaming company’s blog. Hastings’s criticisms centered on the interconnection fees that Netflix is forced to pay some ISPs in order to ensure that its customers are able to get a quality video-streaming experience. “The essence of net neutrality is that ISPs such as AT&T and Comcast don’t restrict, influence or otherwise meddle with the choices consumers make,” wrote Hastings. “The traditional form of net neutrality which was recently overturned by a Verizon lawsuit is important, but insufficient. This weak net neutrality isn’t enough to protect an open, competitive Internet; a stronger form of net neutrality is required.”

As noted by The Verge, the “Verizon lawsuit” that Hastings referred to resulted in a federal appeals court ruling that struck down key segments of the FCC’s Open Internet rules. However, Hastings wants an even stronger form of net neutrality than what was previously covered by the FCC’s rules. “Strong net neutrality additionally prevents ISPs from charging a toll for interconnection to services like Netflix, YouTube, or Skype, or intermediaries such as Cogent (NASDAQ:CCOI), Akamai (NASDAQ:AKAM), or Level 3 (NYSE:LVLT) to deliver the services and data requested by ISP residential subscribers,” noted Hastings. “Instead, they must provide sufficient access to their network without charge.”

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 pulling back and may need time to stabilize. 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

45.85%

96%

94%

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

April Options

Average

Average

May 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 significant 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?

2013 Q4

2013 Q3

2013 Q2

2013 Q1

Earnings Growth (Y-O-Y)

491.17%

300%

345.45%

162.5%

Revenue Growth (Y-O-Y)

24.31%

22.2%

20.23%

17.72%

Earnings Reaction

16.47%

-9.14%

-4.46%

24.28%

Netflix has seen increasing earnings and 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

1.35%

-11.90%

-3.84%

-1.86%

-3.06%

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’s CEO Reed Hastings strongly criticized major ISPs like AT&T, Comcast, and Verizon over their alleged anti-net neutrality behavior in a recent post on the video streaming company’s blog. The stock has been exploding higher, but is currently pulling back. Over the last four quarters, earnings and revenues have been rising. However, investors have had conflicting feelings about recent earnings announcements. Relative to its peers and sector, Netflix has been a year-to-date performance leader. Look for Netflix to OUTPERFORM.

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