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NASDAQ Week: Is Netflix The Next Challenger?

Published 11/25/2014, 01:50 AM
Updated 03/19/2019, 04:00 AM

Business and financials
Netflix is a media company that distributes subscription packages over the internet for TV and movie content. It is also responsible for bankrolling and backing the popular hit show, House of Cards, that features actor Kevin Spacey (a must-see for you drama fiends out there).

The company has gone back and forth between being a darling and dud to analysts, with many questioning its business model after investors sold off the shares heavily post its last results – attributed to it missing its new subscribers target.
There is a concern that its pioneering move of offering media entertainment content over the internet, versus traditional cable and satellite avenues is now being encroached upon by a number of other large and extremely well-funded companies: such as CBS, HBO and Amazon.

A quick glance at Netflix’s financials shows that it has a strong cash position of $1.2 billion (6% of its market cap), with a net debt of minus $700 million, as it has cash well in excess of its debt. While its gross margins have been trending upwards over the past few quarters, most recently at 32%, its EBITDA margins have been fluctuating a bit more coming in at 8.9% in the third quarter from 10.6% in the second quarter. Meanwhile its return on equity and invested capital is also improving at 15.8% (15.1%) and 12.4% (11.5%) respectively.
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Valuation
It takes a lot more real estate to value Netflix versus another pure media internet-streaming provider (e.g. both Apple and Amazon do it, but these are very large businesses with hands in many pies), so I will focus on the consensus view.

Netflix has a consensus price target of $415, implying that there is +15% upside. Yet the price range is very large: from as high as $600 (+67%) to as low as $250 (-31%). Anytime I see such a wide divergence in an interesting name such as this, I tend to do the maths, because it generally means there is a good inflection point and one side of the market is missing something (that is, it’s either an outright buy or sell, or one just cannot get an edge on either and should move on). At the very least, it’s a potential flag for extensive due diligence.

Streaming media provider Netflix backs the hit show House of Cards, which

features actor Kevin Spacey. Photo: Thinkstock

Of the analysts with estimates on the stock, 40% have a buy rating versus. 11% who have a sell rating, with the balance of 49% neutral on the name.

Potential Future Catalysts

• Fourth-quarter earnings, estimated for January 22, 2015
• Effects of competition from other internet streamers
Trading view

While the stock is down slightly – year-to-date minus 2% – from a momentum perspective, it seems like we are just hovering above oversold territory given its near 20% drop on October 15 to close at $362.

We are slightly below those levels as well as below the key 50-, 100- and 200-day moving averages. For now, the low hurdles are the 10- and 25-daily MA around the $377 to $380 levels and after that its $400 to break through on the upside. To the downside $350 is key, with the current $360 level also being a support area. I have no strong views either way. However I am constructive on a broader equity rally into the year end, so a stop at $328 could be interesting.

Nothing is really jumping out at me, albeit volatility seems to have risen excessively in the name recently, with 10-day volatility at 33. It may be interesting to look at some volatility strategies selling puts below $360/$355 level and upside calls above $410 – I’d limit these to max at year end, rather than gamble over their fourth-quarter earnings in January.
From a very near-term tactical basis, I would be tempted to short the stock, as the price action looks weak – just bear in mind it closed down by minus 6.7% for week.
Stock chart seems to indicate that momentum and direction seem to be neither here nor there – yet in the very near-term price action looks weak.
kjkk Source: Bloomberg
Volatility has recently spiked up in Netflix, perhaps suggesting some option positioning.
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