When investors sit around and tell stories of their favorite stocks, it’s always nice to hear about a company that took on a bigger rival and won by re-imagining a business model that everyone took for granted. And that’s exactly what happened with Netflix, Inc. (NFLX, Nasdaq), the little company that took on big, bad Blockbuster and sent it sprawling using the U.S. mail (!) as its secret weapon. It’s rarer still for a company like Netflix to go to the well twice, staying flexible enough to change its strategy again. But that’s what Netflix is doing, pioneering the streaming delivery of movies and other video content through home computers and game consoles. Streaming movies costs even less to deliver than the Postal Service, and all Netflix has to do is keep the servers loaded and the money rolls in. Q1 results showed the benefits, with a 63% gain in earnings on just a 26% jump in revenue, showing how much more cash flow is winding up on the bottom line with low-cost streaming delivery. Netflix has been a Cabot Top Ten favorite over the years (23 total appearances before today) and that’s a great testimonial to founder and CEO Reed Hastings’ powers of re-invention.
The chart for NFLX shows a big gap up on earnings in late January, then another gap up on earnings in late April. This run took the stock from 50 to over 100 in just three months. The stock traded sideways for four weeks after the April report, falling below its 25-day moving average for a few days. But things got moving again in late May, and NFLX is holding well above 100 on moderate volume trading. A dip toward the 25-day moving average, now at 103, would lower the risk a little.
Suggested Buy Range: 100-105
Michael Cintolo, Cabot Top Ten Report