Trading Opportunities for Netflix, Inc. (NASDAQ:NFLX)

Investors who are focused solely on fundamentals often miss trading opportunities, and investors who are focused only on trading often miss investment opportunities, so we believe it is always import to incorporate both into our observations.

After the aggressive decline in Netflix, Inc. (NASDAQ:NFLX) recently it is important for us to rationally digest fair valuation.  The observations below are being made in conjunction with data that is already offered to clients of stock traders daily.  The opinions here may have already been acted upon by clients of stock traders daily as a result.

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First, my observations of Netflix in the past revealed the relationship between revenue growth and humiliation of debt that I thought was very concerning.  I'm not going to talk much about that relationship here other than to say that revenues have begun to decline for the first time since 2009.  The decline in revenue is a concern, but other concerns exist.

NFLX Netflix Revenue

Earnings are clearly important to investors and although Netflix has been growing earnings nicely since the first quarter of 2012, after the company made material missteps, earnings recently have stalled.  When analysts look at a simple EPS chart for Netflix we can see that earnings seemed to stall in the second quarter of 2014 at the same level they stalled in the second quarter of 2011, before the earnings decline that followed. 

NFLX Netflix EPS Earnings

Our observations here do not suggest that earnings will fall aggressively again, although they have already begun to fall slightly, but it does bring into question continuing growth prospects, and that is what really matters.  With the first revenue decline in the company's history and an earnings decline from what seems like a former peak, investors are rightfully asking themselves if Netflix can continue to grow as fast as it has recently.  This brings our earnings growth chart into focus.

Our earnings growth chart is a trailing 12 month observation aimed at removing onetime events and focusing on growth from operations to best define the real growth rate for the company.  Our yearly EPS growth chart shows us that the EPS growth rate for Netflix has been declining steadily since the third quarter of 2013 and although yearly EPS growth rate is 78%, still a solid member by any measure, the trend is clearly down and the hiccup in earnings recently will likely cause the future growth rate to decline measurably as comps become more challenging.

NFLX Netflix EPS earnings Growth

That shifts our focus to valuation, and we use a trailing 12 month peg ratio to help us identify value, but to reach a definitive conclusion we must start with a closer look at the PE multiple.  Although the PE multiple has been as high as 180x earnings, it is currently much lower than that, at 100x.  At first glance the 78% growth rate for the company is currently reporting makes that PE multiple seem reasonable, but if future earnings do not completely offset the hiccup that happened recently that otherwise attractive relative valuation will go away.

NFLX Netflix PE Price Earnings Multiple

Technical observations:

According to our real time trading report for Netflix the stock has recently tested longer term support and if our longer term support level remains intact we expect the stock to continue to increase until it tests longer-term resistance.  Our report offered buy signals at longer term support with longer term support as our defined risk control.  If support breaks we would not hold the stock.

Summary:

Shares of Netflix have fallen aggressively, they have successfully tested our longer term support level, and buy signals have surfaced.  However, these buy signals are not designed to be long term in nature but instead our observations suggest they are relatively short term (months) and fundamental risks exist at Netflix which will likely continue to impact the shares over the next few quarters.

On a personal note, although I have thoroughly enjoyed Netflix from time to time eventually the service becomes boring if they do not continuously update content that is interesting to me, and although the content that interests me is not necessarily the same content that might interest others, I believe the general opinion is the same.  So long as Netflix continues to update interesting content they will retain subscribers, but that takes money, and that is exactly why my prior observations warned that the increasing debt load could eventually wreak havoc on the company because there was a direct relationship between subscriber growth and debt.

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