Will Netflix Continue Previous All-Time Highs?

With shares of Netflix (NASDAQ:NFLX) trading around $291, 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.

In regards to Netflix, Morgan Stanley (NYSE:MS) estimates that there are 79 million broadband-using households in the U.S. and predicts that there will be 89 million by 2017. Further, the firm believes that 45 million to 60 million U.S. households actually have “devices capable of bringing Netflix to TVs,” and expects that number to “converge with broadband households” in time. Based on its growth hypothesis, the firm has lifted its price target on Netflix to $314 from $270.

T = Technicals on the Stock Chart Are Strong

Netflix stock has been exploding at an increasing rate in the last several months. The stock is getting ready to test previous all-time high prices. 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.

(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	41.97%	40%	39%

What does this mean? This means that investors or traders are buying a 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 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 Improving 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	214.90%	17.96%	13.70%	12.59%	20.19%

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 has excellent future prospects, according to Morgan Stanley. The stock has been surging higher this year and is now inching closer to all-time high prices. Over the last four quarters, investors have had mixed feelings about the company as earnings have been improving while revenues have been rising. Relative to its peers and sector, Netflix has been a year-to-date performance leader. Look for Netflix to OUTPERFORM.