Should You Consider Netflix?

With shares of Netflix (NASDAQ:NFLX) trading around $370, 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.

Yesterday, Netflix CEO Reed Hastings announced that due to the company’s recent higher-than-expected growth in the first-quarter of this year, prices for subscribers will be increasing “later this quarter” by $1-$2 a month. Of course the moment this announcement came down, the Internet’s loud-speaker was pushed to eleven as customers across the country took to social media to express their disapproval. Ignoring the general concepts of business expansion, what these detractors fail to realize is the ways in which this price increase benefits them and the medium they love so much, and how no matter what they do, the outcome can only be positive.

T = Technicals on the Stock Chart Are Strong

Netflix stock has exploding higher in the last couple of years. 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 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

40.88%

30%

28%

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

Average

Average

June 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 minimal 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)

24.02%

24.31%

22.2%

20.23%

Earnings Reaction

6.35%*

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.

* As of this writing

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

0.28%

-16.40%

-0.99%

1.07%

-2.92%

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 CEO Reed Hastings announced that due to the company’s recent higher than expected growth in the first quarter of this year, prices for subscribers will be increasing “later this quarter” by $1-$2 a month. The stock has been exploding higher and looks set to continue. 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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