Will Recent Deal Discussions Boost Netflix?

With shares of Netflix (NASDAQ:NFLX) trading around $324, 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 is reportedly in negotiations with pay-TV providers Comcast (NASDAQ:CMCSA) and Time Warner Cable (NYSE:TWC), among others, to provide its service as a part of pay-TV packages and allow pay-TV providers to include Netflix as an app on their set-top boxes. According to people familiar with the matter who spoke to the Wall Street Journal, talks are in early stages and could still break down. Netflix cut a similar deal with the U.K.’s Virgin Media recently, but pay-TV and Netflix are still enemies in many ways, although they are apparently willing to explore partnerships.

T = Technicals on the Stock Chart Are Strong

Netflix stock has been exploding higher over the last several years. The stock is currently trading slightly below all-time high prices 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 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

70.48%

90%

88%

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

244.30%

23.85%

24.09%

23.26%

38.57%

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. The company is reportedly in talks with top pay-TV providers in order to bring its product to the pay-TV networks. The stock has been exploding higher and is now trading slightly below all time high prices. Over the last four quarters, earnings have been improving while revenues have been rising which has produced mixed feelings among investors about recent earnings announcements. Relative to its peers and sector, Netflix has been a year-to-date performance leader. Look for Netflix to continue OUTPERFORM.

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