Where Will Netflix Go Next?

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.

Morgan Stanley (NYSE:MS) analyst Scott Devitt on Tuesday downgraded Netflix to underweight and lowered his price target to $310 from $333. Netflix faces tougher competition from Amazon Prime Instant Video, Hulu Plus, HBO Go and other online video providers, said Devitt. Media giant Time Warner (NYSE:TWX) owns HBO. Hulu’s owners – 21st Century Fox (NASDAQ:FOXA), Walt Disney (NYSE:DIS), and Comcast (NASDAQ:CMCSA), which doesn’t have management control for regulatory reasons — took Hulu off the block this summer after exploring a sale. ”We expect the landscape for streaming video on demand (SVOD) services to grow increasingly competitive in 2014 as widespread distribution is much more easily attained and content owners become more willing to license their programming to SVOD providers,” wrote Devitt. “We think services like Amazon Prime Instant Video, HBO GO and Hulu Plus offer compelling content catalogs and may represent viable alternatives to Netflix for some consumers.”

T = Technicals on the Stock Chart Are Mixed

Netflix stock has been exploding higher in the last several years. The stock is currently pulling back and may need time to consolidate before heading higher. 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 signals neutral 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	50.8%	93%	90%

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
February Options	Average	Average
March Options	Average	Average

As of Wednesday, there is 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 Q3	2013 Q2	2013 Q1	2012 Q4
Earnings Growth (Y-O-Y)	300%	345.45%	162.5%	-78.96%
Revenue Growth (Y-O-Y)	22.2%	20.23%	17.72%	7.96%
Earnings Reaction	-9.14%	-4.46%	24.28%	42.22%

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 = Weak Relative Performance Versus Peers and Sector

How has Netflix stock done relative to its peers – Amazon (NASDAQ:AMZN), Comcast (NASDAQ:CMCSA), and Outerwall (NASDAQ:OUTR) — and sector?

	Netflix	Amazon	Comcast	Outerwall	Sector
Year-to-Date Return	-6.19%	0.34%	2.61%	3.72%	1.12%

Netflix has been a poor relative performer, year to date.

Conclusion

Netflix is a streaming service that provides video entertainment to consumers in the United States. Morgan Stanley analyst Scott Devitt on Tuesday downgraded the company to Underweight and lowered his price target to $310 from $333. 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 mixed feelings about recent earnings announcements. Relative to its peers and sector, Netflix has been a poor year-to-date performer. WAIT AND SEE what Netflix does this quarter.