Netflix Stock: Netflix Inc. Bears Will Be Running For Cover

Netflix Inc. (NASDAQ:NFLX) stock traded at all-time highs following the latest earnings announcement. Is Netflix stock still a good buy?

Netflix Stock - Netflix Inc Bears Will Be Running For Cover
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The last year or so has been one of many changes. Among the many changes was the birth of the 'FAANG' group of stocks, born out of the original 'FANG' group of stocks, a term coined by Jim Cramer. The FAANG group of stocks represents the five most popular and best performing tech stocks in the market: Facebook (NASDAQ:FB),   Apple (NASDAQ:AAPL), Amazon (NASDAQ:AMZN), Alphabet (NASDAQ:GOOGL),                         Netflix (NASDAQ:NFLX). The popularity of Reed Hastings founded Netflix, Inc. among investors can be gauged from the fact that Netflix stock finds a place among the 5 FAANG stocks.

Netflix stock price vs FAANG stocks comparison

Each of the FAANG stocks has outperformed the benchmark index; Nasdaq Composite (INDEX:COMPX), this year. Impressively, Netflix stock has led the pack, rising by over 61% year-to-date with Facebook stock coming in second with YTD returns of 53%. To put things in perspective, the Nasdaq Composite index is up by 23% in the same timeframe. If the latest earnings announcement is any indication, the good times for Netflix stock and its investors are far from over. Here is why.

Netflix Stock Could Power To All-time Highs

Netflix reported its Q3 2017 earnings earlier this week. The online streaming giant reported EPS of $0.29, a 3-cent earnings miss. On the revenue front, Netflix reported revenue of $2.99 billion, beating the consensus estimate by $20M. While the company did miss on the bottom line expectations, the numbers reflected yet another quarter of strong growth. The 29 cents earnings per share represented growth of 142% YoY while the revenue print was 30% higher than the year-ago number.

Apart from the top line and bottom line numbers, Netflix crushed expectations on another very important metric: subscriber numbers. The company reported 850K domestic streaming additions vs. consensus of 774K additions. International streaming additions came in at 4.45M compared to a 3.72M consensus. In total, the company added 5.3M subscribers, compared to expectations of 4.49 M addition in the quarter. As any follower of the Netflix counter will know, subscriber numbers are the most important and closely watched numbers in every Netflix earnings release. Given the strong subscriber additions and in-line guidance, a rally in Netflix stock price will not be all that surprising.

Merchandise sales Could Be A Strong Growth Driver

The Netflix Q3 earnings call had another important announcement. A reference to merchandise sales. Quoting Netflix CEO Reed Hastings from the earnings interview, "We've all got our Stranger Things sweaters on because we're celebrating both the amazing content that's coming in 10 days or so, and also targets a great promotional strategy, we’re learning how to do merchandising, we've got some amazing displays and amazing materials out at target." In other words, Netflix will leverage its original content to drive merchandise sales, which will be additive to the company's top line as well as bottom line. And what kind of a potential does merchandising hold for Netflix?

The chart below (from Statista), which shows how lucrative merchandise licensing can be, helps to answer this question. As can be seen from the chart below Walt Disney (NYSE:DIS) excels at merchandise licensing with global retail merchandise sales of $56.6 billion in 2016.

chart of the day 11509 top 10 merchandise licensors

If Netflix can generate even a fraction of what the leaders in this space are generating, merchandise licensing could add a significant growth lever to the company, given the huge popularity of its original content.

Netflix Stock Set For A Short Squeeze

The strong results and the newfound growth lever of merchandising sales are indications that the Netflix growth story is far from over. These are indicative of the fact that the company can sustain its solid growth numbers, which make Netflix stock a solid growth play. As we had mentioned earlier, given the strong quarterly results, Netflix stock is likely to continue its long-term uptrend. Investors should also take note of the high short interest in NFLX stock. As reported by S3partners, Netflix is the sixth most shorted stock in the US with over $5.6 billion worth of stock sold short. As of the last reporting cycle, the days to cover (DTC) stood at 4.69 days, which is rather high. The high short interest and DTC imply that any rally in Netflix stock price could force a short squeeze, which could add fuel to the rally and send the shorts scampering for cover. All in all, Netflix bears could be running for cover, sooner rather than later.

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Virendra Singh Chauhan Virendra Singh Chauhan   on Amigobulls :

Neither Amigobulls, nor any members of its staff hold positions in any of the stocks discussed in this post. The author may not be a certified/registered investment advisor, and the opinions expressed should not be treated as investment advice.

Buying and selling of securities carries the risk of monetary losses.Readers/Viewers are advised to carry out their own due diligence and consult their investment advisors before making any investment decisions.

Neither Amigobulls, nor the author have any business relationship with any of the companies covered in this post.

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