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Netflix (NASDAQ:NFLX) unveiled its online video streaming services in Finland on Thursday, following previous launches in Sweden, Denmark, and Norway earlier this week. Netflix Co-Founder and Chief Executive Reed Hastings said, “Initial signups exceeded our expectations; the Nordic people have definitely shown that they are ready for the future of television.”
With shares of Netflix now trading at around $67, is NFLX a BUY, a WAIT and SEE, or a STAY AWAY?
Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:
C = Catalyst for the Stock’s Movement
The expansion into the Nordic region should give Netflix a boost, particularly if subscription rates prove to be as strong as company leadership anticipates. There are an estimated 10 million households with broadband access whose patronage Netflix will attempt to win. Additionally, the video streaming service provider is scheduled to release its fiscal third quarter earnings next Tuesday, October 23. Netflix hopes the Q3 numbers will maintain the positive revenue momentum the company has enjoyed over the past four quarters.
A = A-Level Management Runs the Company
Co-Founder and CEO Reed Hastings has a solid reputation of being a positive leader of the company. Employees feel that executive management is not afraid to challenge its employees, and also isn’t afraid to reward them for work well done. 70 percent of anonymous Netflix employees reportedly approve of Hastings and the way he runs the company.
T = Technicals on the Stock Chart are Weak
As of October 18, 2012, the stock price is 8.61 percent above its 20Day Simple Moving Average; 10.34 percent above the 50 Day SMA; and 19.56 percent below the 200 Day SMA. Since the beginning of 2012 the stock price has been in a downward trend and is down 1.11 percent year-to-date and down 38.68 percent year over year.
S = Support is Provided by Institutional Investors & Company Insiders
Netflix is 93.61 percent institutionally owned. Some noteworthy top holders include Charles Schwab Investment Management Inc., Chevy Chase Trust Holdings Inc., Virtu Financial LLC, Shell Asset Management Co., and Exxonmobil Investment Management Inc.
Here are some of the biggest most recent transactions by company insiders: Director Jay Hoag bought $10,477,516 of shares on May 10; Director Richard Barton bought $510,300 of shares on April 25.
E = Excellent Relative Performance to Peers
Many investors favor Return on Equity as a key metric to how well the company is operating. Netflix’s operational performance is in the middle of the pack compared to peer companies. NFLX has an ROE of 19.42 percent while rival Coinstar (NASDAQ:CSTR) comes in higher at 30.05 percent while Amazon.com (NASDAQ:AMZN) has an ROE of just 4.94 percent — although Amazon is in many more businesses than movies.
Operating margins are also critical for stock evaluation. Netflix drags a bit behind with a margin of 5 percent compared to 12.86 percent for Coinstar. Amazon has an operating margin of only 1.17 percent, but as we noted above does a variety of business beyond video streaming that affects its margins.
Netflix has had a rough 2012 so far, but despite earnings declines the company has managed to exceed analysts’ expectations for each of the last four quarters. Recent improvements seem to suggest that perhaps the worst times are over. The new, forward-thinking moves into untapped markets like Scandinavia should help.
Shares in Netflix are sure to move next week after its third quarter earnings are unveiled. The question is: which way will they move? Analysts are projecting slight declines for Netflix in Q3, but aggressive investors may decide the company has righted the ship and is primed for a rebound.
For now, Netflix looks like a WAIT AND SEE based on the key metrics above.
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