Is Netflix Well-Positioned for the Future?

With shares of Netflix (NASDAQ:NFLX) trading around $342, 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.

It looks like Netflix has learned its lesson. On Friday, the company raised the price for new subscribers to its streaming video service from $7.99 to $8.99 per month. Existing customers have their price of $7.99 locked in for two years. Wouldn’t you know it, no one seems to be complaining. The reason this is notable is because of what happened last time it raised its prices. Back in 2011, subscribers paid $9.99 per month to watch streaming video and receive DVDs in the mail. Then the company decided to split the two services and charge $7.99 for each. That meant that if you wanted to maintain your access to their DVD rental and streaming services, you had to pay $16 per month, which amounted to a 60 percent price increase. New subscribers had to pay the new price immediately, but existing subscribers got a two-month window of paying the same amount. Customers were not happy and were very vocal. A 60 percent price increase was too much for many subscribers, leading some people to drop one service, and many others to drop Netflix altogether.

To make matters worse, Netflix also planned to rebrand its DVD rental service under the name Qwikster. The idea was to make Qwikster a completely separate company from Netflix, which would mean it’d have two separate websites and two separate subscription platforms. Customers to both services would have had to maintain two watch lists, two profiles, and two sets of movie ratings in order to keep their accounts in sync. All the while, apparently no one at Netflix had checked the availability of the @qwikster Twitter handle, which belonged to an often-unintelligible, pot-smoking teenager. The whole idea was very ill-conceived, causing investors to abandon ship in droves. Netflix’s stock quickly took a downturn, going from nearly $300 per share down to around $60 in four months. A few weeks later, Netflix CEO Reed Hastings wrote a blog post retracting some of the changes. “It is clear that for many of our members two websites would make things more difficult, so we are going to keep Netflix as one place to go for streaming and DVDs. This means no change: one website, one account, one password … in other words, no Qwikster.”

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 poised 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 slightly 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

42.62%

10%

8%

What does this mean? This means that investors or traders are buying a 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

Steep

Average

July 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 small 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

-7.13%

-24.70%

-2.30%

2.38%

-6.93%

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. On Friday, the company raised the price for new subscribers to its streaming video service from $7.99 to $8.99 per month. 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 an average year-to-date performer. WAIT AND SEE what Netflix does this quarter.

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