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Why Netflix could break more records

Talking Numbers

Netflix surprised Wall Street by beating earnings estimates and showing large subscriber growth. But, is it just a "house of cards"?

Shares of Netflix rocketed up 17% on Thursday, making it the single best day best since last April.

Netflix was boosted after it beat Wall Street's earnings expectations and announced an additional 2.3 million subscribers in the final quarter of 2013.

Few investors have been happier in the past year than Netflix's shareholders. In 2013, shares soared 298%. Year-to-date, Netflix added an additional 6%.

Talking Numbers contributor Richard Ross, Global Technical Strategist at Auerbach Grayson, thinks the stock is headed much, much higher.

"There is room to run," says Ross on CNBC's Street Signs' Talking Numbers segment. "In fact, the stock is up $54 today against the backdrop of a very sloppy global macro tape. We call that outstanding relative strength."

According to Ross' charts, after breaking below a head and shoulders pattern, the stock built up support around its 100-day moving average. Thursday's spike up was significant, according to Ross.

(Watch: If you own Netflix, be aware: Trader)

"We're right back up to that $388 - $390 level," notes Ross. "Not only is that your December high, but is also corresponds with that October high where Carl Icahn famously sold out his position. I think we break through that psychological and technical resistance [at $390] and there's plenty of room for upside here. You want to be a buyer, even in the wake of today's fantastic run."

Marc Lichtenfeld, Chief Income Strategist at The Oxford Club, disagrees with Ross' view and thinks Netflix is overpriced.

"I think Netflix share prices are a house of cards," says Lichtenfeld, making reference to Netflix's popular original series. "They only generated $5 million in cash flow in the fourth quarter with 30 million subscribers. Cash flow was negative in 2013. Going forward, in 2014, they're only projected to generate $200 million in free cash flow. That gives the stock a price-to-cash flow valuation of over 100 times. That's ridiculous."

Besides being priced high on a cash flow basis, Lichtenfeld believes Netflix is too high on a P/E basis, as well.

"Their forward price-to-earnings is over 80 times," says Lichtenfeld. "The valuations aren't reasonable until you get out to 2017 – 2018 estimates."

Lichtenfeld also thinks the market is underestimating the potential negative effects from net neutrality's end in the United States.

"I think it's naïve to think the company doesn't suffer costs from having to pay more for bandwidth or having to pass that on to the consumer," says Lichtenfeld.

But, it's also Netflix's CEO Reed Hastings character Lichtenfeld questions. During Netflix's earnings call Wednesday night, Hastings made an off-color joke about HBO CEO Richard Plepler's password.

"That just smacks of arrogance to me," says Lichtenfeld. "Arrogant CEOs typically do not make money for their shareholders."

(Watch: Netflix CEO Hastings talks smack, ignites shares)

However, Richard Ross believes there are long-term fundamental reasons that make Netflix a buy to match his technical reasons, including its international growth and the fact that the company represents about one-third of all internet traffic in North America during peak hours.

"This company has reinvented itself," says Ross, who notes the Netflix's $22 billion market capitalization. "That's the same market cap as Tesla. That's below Twitter, and I would say much more traction here with Netflix."

"This stock and this company have plenty of room to grow," says Ross.

To see more discussion of Netflix by Ross on the technicals and Lichtenfeld on the fundamentals, watch the video above.

 

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