Netflix, Inc. (NASDAQ:NFLX) is up almost 25% in just a few days after the streaming video giant reported first-quarter earnings.
The reaction might be a bit surprising to some, seeing as NFLX stock actually missed its profit forecast — and, in fact, Netflix earnings for Q1 were down considerably year-over-year. What impressed investors, however, was the $1.57 billion in revenue Netflix racked up — up 24% from $1.27 billion a year ago on strong international growth.
Also noteworthy: While earnings tallied just 38 cents a share, NFLX stock execs said earnings would have hit 77 cents a share excluding foreign exchange losses.
Netflix stock investors know that the company is no stranger to big moves on earnings. But the million-dollar question is whether the run will continue.
I think it will — and here’s why:
NFLX Stock Has a Floor Under It
Like every big-time growth stock, Netflix is all about the momentum and sentiment. And sentiment is very strong right now, creating a floor under NFLX stock.
Here’s what InvestorPlace’s Head Trader & Strategist Serge Berger recently pointed out about the long-term trajectory of NFLX stock and how it responds after runs like this:
“After the stock broke to new highs in autumn 2013, Netflix continued the ascent for another six months before settling into a choppier consolidation period for the rest of 2014. However, the consolidation phase held above the previous highs (lower black line) in textbook fashion and ultimately with last week’s move broke out of this sideways channel in a violent manner.”
Serge does warn, however, that after this run “pause” is in order, if not a brief move down.
That means savvy investors could be facing a strong long-term buying opportunity if and when this pullback happens in the short-term in anticipation of a continued uptrend across 2015 and into 2016.
Lots to Like About Netflix Stock
It’s not just the charts that indicate the move in NFLX stock is sustainable, either.
It’s important to note that the big move up was not simply a short squeeze created by bears bailing out and bidding the stock higher; Netflix short interest actually was down in anticipation of earnings and in line with the last several months of short interest.
Also noteworthy is the significant global growth that has actually lived up to investor expectations and portends future success.
International revenue has soared from $267 million in Q1 2014 to $415 million in Q1 2015 — 55% growth in the last year. Netflix still is not yet profitable overseas as marketing costs continue to climb, but while new customer acquisition is expensive, we can expect better margins over time as those NFLX subscribers stick and become regular revenue providers to the streaming giant.
Investors should also remember that Netflix is a perpetual target of buyout buzz, particularly now that major television providers are seriously addressing life beyond cable TV.
Verizon Communications Inc. (NYSE:VZ) just announced a move toward a la carte programming and so-called “unbundling” of massive cable packages that force subscribers to pay for more channels than they actually watch. And as John Divine recently pointed out, it may not be crazy for Verizon to just go whole hog and pony up to purchase Netflix and move all the way into the post-cable-TV age.
Similar talk swirls about other digital names, including Amazon.com Inc. (NASDAQ:AMZN), Google Inc. (NASDAQ:GOOG, NASDAQ:GOOGL) and Apple Inc. (NASDAQ:AAPL) as they all build up content delivery on mobile devices.
Should you buy Netflix just because of a buyout rumor that won’t come to pass? No way. And should you be concerned about the big run-up losing momentum? Sure.
But long-term investors should think several moves ahead instead of just focusing on the next several months. I personally am looking for a 10% pullback or so to under $510 a share — and I’ll be buying NFLX stock to ride this streaming giant higher.
Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” As of this writing, he did not hold a position in any of the aforementioned securities. Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP.
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