Netflix had a great 2013. Here's why the company may be sowing the seeds for a better 2014.
This week, Talking Numbers looks at the best and the worst of 2013. Today, we focus on Netflix, the best performing stock in the S&P 500 index.
By all accounts, Netflix hasn't just had a good year – it's had a fantastic year.
Last week, the video rental/streaming video provider's original content received six Golden Globes nominations, more than the original big three networks ABC, CBS, and NBC (owned by CNBC's parent, NBC Universal). Not a bad showing for a company that got into original content in the past year.
(Watch: Bingeing on Netflix)
Yet while Kevin Spacey and Taylor Schilling may be starring on Netflix subscribers' small screens, Netflix's stock has been starring on investors' trading screens throughout 2013. Year-to-date, shares of Netflix are up nearly 300%. In the eleven and a half years since going public, Netflix's stock is up 4763%. That means shares have averaged 40% returns annually.
That has investors asking, can this stock continue to give tremendous returns?
"The number one rule in this business is that past performance is no guarantee of future success," says Talking Numbers contributor Richard Ross, Global Technical Strategist at Auerbach Grayson. "While I don't expect Netflix to be the best performing stock in the S&P 500, I do expect it to be an outstanding performer next year by virtue of the technicals alone."
Ross notes the stock has been trading in a well-defined upward-sloping trend channel since 2002, the year it became a publicly-traded company.
Still, Ross offers this caveat for investors who may think of going all-out in Netflix next year. "Netflix is a stock you want to own but, keep in mind – size that position appropriately for the risk that is commensurate with this name," says Ross.
"You have to recognize that a stock doesn't go from under $3 to over $300 for nothing; you get what you pay for," says Ross. "There's no free lunch on Wall Street. So, keep that position size small so that you can sleep at night and still the fruits of the labor when this stock works its way higher."
CNBC contributor Gina Sanchez, founder of Chantico Global, says Netflix is laying the foundation for greater growth down the road.
"You have to look at the fundamentals on Netflix," says Sanchez. "First of all, its current ratio is quite good. It's well-managed. It has cash on its balance sheet."
In the last quarter, Netflix's current ratio – the ratio of short-term assets to short-term liabilities indicating the company's ability to pay short-term debts – was at 1.47. It has about $439 million in cash and cash equivalents.
Sanchez notes that some measures have fallen for the company but that may not be a long-term negative.
"Recently, its profitability has been really suffering," notes Sanchez. "You look at return on equity [or] return on assets, and that has really fallen. The reason for that is management has basically putting a lot of that cash into new content acquisition and its expansion – both in the US with this original content and also internationally where they have very little revenues right now. So, there's actually significant potential for upside there."
Overall, Sanchez is generally positive on Netflix's ability to execute its future plans.
"I think what they're doing in original content is extraordinary and I think that their potential in international markets is also extraordinary," says Sanchez. "While right now I'd say the balance sheet looks a little iffy, we have seen an uptick in retained earnings in Netflix."
"It's not going to be a knock-the-lights-out year again for Netflix, but I think it's going to be a solid performer."
To see Ross' charts and the discussion by Sanchez on why they think Netflix is a buy, watch the video above.
More from Talking Numbers: