Netflix (NASDAQ: NFLX) is active in an industry with huge potential. They recently announced that they had approved a seven-to-one split on its stock and the news was welcomed by investors.
With a presence in more than 50 countries and a global client pool that exceeds 60 million, it’s amazing that Netflix seems to only just be at the start of their expansion. The fact that the shareholders are rewarded is no surprise.
The stock started around the $100/share mark back in early 2012 but has now surged to $700/share, showing a seven-fold increase, and in the same time, it led the S&P500 to record highs as well.
What are the secrets of this success story, and can the rally be sustained?
It’s difficult to find any flows in such a niche industry that Netflix is in. Cash-rich companies have a tendency to weather better during a storm, however, some turbulence may lay ahead. Apple is just one example of the challenges that come to mind. Control the hardware, and you can eventually control the software.
As for those that are questioning the sustained rally, I would say that when it comes to investing in a stock/stock picking, the actual price/earnings ratio and valuations are important, but it all comes down to what the overall stance in monetary policy is.
In our case, in the United States, monetary policy is beyond easy.
Imagine how a central bank works and what the “job” of a central bank is. In the United States, the central bank, the Federal Reserve of the United States, has a dual mandate: to keep inflation below or close to two percent, and to create jobs.
Based on those two tasks, monetary policy is being set in such a way that it ensures reaching those goals as soon as possible.
In recent years (almost eight years now), we saw interest rates at zero levels (ZIRP – zero interest rate policy) and on top of that, the market was flooded with three rounds of quantitative easing that lasted several years as well.
The outcome of such a loose monetary policy is assets being inflated, therefore stock prices are moving higher as money is being directly pumped into the markets.
What would be better than choosing a company such as Netflix, in an environment in which valuations don’t matter anymore? Almost nothing.
Therefore, taking into account the fact that Fed is most likely to keep its monetary policy at the current, easy levels, I would favor call options on the NFLX stock price with as big an expiration date as possible.
Disclaimer: Any financial trading analysis offered here is our opinion and is not intended as advice or direction for investors. We cannot guarantee the success of any trades made as a consequence of this article, and we encourage traders to incorporate a strong money management strategy to limit losses when they enter the markets. Please use this article as part of your own research before formulating strategies prior to trading.
