Netflix Inc. (NASDAQ:NFLX) stock traded at all-time highs following the latest earnings announcement. Is Netflix stock still a good buy?
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.
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.
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.
Looking for fundamentally better tech stocks? Check out Amigobulls' top stock picks from the tech sector, which have beaten the NASDAQ by nearly 169%. Interested in automotive stock? Then, we also have our top picks from the auto sector, which have beaten the S&P 500 by over 291%. If you're a trader though, you should check out our daily trading ideas section for daily, free updates on the latest crossovers and other popular technical signals.