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April 23, 2013

Stock of the Day

Recommendation: B-rated Buy

Welcome to the Stock of the Day for April 23, 2013. Have you heard the latest about Netflix Inc. (NFLX)? Shares of the video streaming service are up over 20%, making it the S&P 500's top performer today. Today's first-quarter earnings release has made it clear that 2013 will be a game changer for Netflix, so if you're a shareholder or are considering this stock, you won't want to miss today's Stock of the Day.

Company Profile: Since 1997, Netflix Inc. has been a leading provider of on-demand internet streaming and DVD-by-mail services. With just over 2,300 full-time employees, the company brought in $3.2 billion in sales last year. Over the past few years, the company has worked double-time to increase its subscriber base, launching in Canada (2010), Latin America and the Caribbean (2011), the United Kingdom, Ireland and Scandinavia (2012). As such, Netflix's membership has more than tripled in the past four years to 36 million. But over the past few years, the company drew harsh criticism for its failed attempt to split into two services and, in a separate occasion, raising prices for as much as 60% of its services. To woo its subscribers, Netflix is in the process of launching a new crop of original programming, including the recent release of House of Cards and the re-launch of Arrested Development, which is due out late next month.

Earnings Buzz: After yesterday's closing bell, Netflix Inc. reported strong growth across the board. To start, last quarter alone the company added about three million subscribers, bringing the total count to 36 million around the globe. The company also announced that subscribers watched nearly a billion hours of programming each month. So in the first quarter, the company swung to a $3 million profit; this is a turnaround from the $4.6 million net loss Netflix reported in Q1 2012. Adjusted earnings weighed in at $0.31 per share, which trounced the $0.18 consensus estimate by 72%. Meanwhile, revenues climbed 18% to $1.024 billion; this also topped the $1.02 billion consensus estimate. The surprisingly strong results sent shares of NFLX soaring over 20% at today's open and sparked a wave of analyst upgrades.

Competition Breakdown: Netflix is a unique company—there isn't another company that is quite like it. But there are plenty of other players that eat into this company's market share, including Amazon.com Inc. (AMZN), which offers video streaming services at a pay-per-view basis, and Coinstar Inc. (CSTR), the owner and operator of Redbox video kiosks. But when you go to plug all three competitors into Portfolio Grader, you see that Netflix is still top dog with institutional investors, so it outranks the other two overall. Meanwhile, Coinstar Inc. has the strongest fundamentals (with top-of-the-line cash flow, return on equity and earnings surprise track record), but buying pressure for this stock has deteriorated so much that I'm compelled to consider it a sell. Amazon.com Inc. is an entirely different story; while its fundamental strength leaves something to be desired (with seven of the eight metrics failing outright), institutional buying pressure is strong enough to keep it in hold territory. So while CSTR is a D-rated sell, AMZN is a C-rated hold.

Current Ratings: Before you buy any stock, you should always run it through my free Portfolio Grader ratings system. As I just mentioned, NFLX is currently enjoying stronger institutional buying pressure than the competition. This is important because it indicates stronger profit potential for shareholders. However, if you decide to buy into NFLX, keep a close eye on this metric, as shown by its Quantitative Grade. NFLX currently receives a B for its Quantitative Grade, but if this is downgraded, it could drag the stock down into hold territory. That's because Netflix still has room for improvement in terms of its financial health. Netflix is doing well with cash flow and the recent round of analyst earnings revisions (both A-rated), but it is quite weak in terms of earnings growth, operating margin growth and earnings momentum (all F-rated). Netflix also receives lackluster ratings for return on equity (D-rated), and sales growth and its earnings surprise track record (both C-rated). NFLX, an Aggressively ranked stock, receives a C for its Fundamental Grade.

Bottom Line: As of this posting, April 23, I consider NFLX a B-rated Buy.

Would you like to check the fundamentals backing up one of your stocks? For more stock grades, please visit my Portfolio Grader website!

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