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The Internet has been leading the broad tech sector thanks to solid performances, impressive outlooks, and broad investor interest. One of the biggest winners in this corner of the market is no doubt the online streaming entertainment firm, Netflix (NFLX - Analyst Report).
Shares of NFLX have shot up 250% since the start of the year, making the company one of the hottest stocks, and a favorite pick among most investors. In fact, Netflix is the biggest gainer in the S&P 500 index, at time of writing, for 2013 (read: 3 Niche ETFs Crushing the Market).
Inside the Incredible Surge
The astounding performance was mostly attributable to optimism from some brokerage firms on the company’s growth prospects. Netflix is in the process of transforming its streaming service to a Web-based television network, and it has had great success so far.
Earlier this week, the company surpassed our estimates on both earnings and revenues on an expanding subscriber base. Netflix added 1.28 million domestic and 1.44 million international subscribers, thus having a total customer base of 40 million plus for the first time. The number was well above management expectations of 1.09 million and 0.90 million for domestic and international subscriber additions, respectively.
Subscriber gains at home were credited to the huge success of NFLX’s original shows – "House of Cards" and "Orange Is the New Black". Notably, the company clearly pushed back its major rival Time Warner’s (TWX - Analyst Report) Home Box Office in terms of total subscriber base in Q3.
Earnings at the streaming media service provider quadrupled to 52 cents per share in Q3, beating the Zacks Consensus Estimate by 4 cents. Revenues climbed 22% to $1.11 billion and outpaced our estimate of $1.10 billion (read: Top Ranked Tech ETF for Q3 Earnings Season).
Further, the company provided an upbeat guidance for the fourth quarter. Earnings per share are expected in the range of 47-73 cents, while total subscriber base will likely reach 32.7–33.5 million in the U.S. and 10.1–10.9 million internationally.
Though Netflix seeks to double its spending on original content next year, this would still be less than 10% of global content expense. The company plans to expand its content portfolio by launching more television shows and making its own movies.
Impressed by robust subscriber gains and strong growth prospects, twelve analysts revised their target prices upward on the stock. This move has put more optimism into the stock’s future. In fact, NFLX shares soared nearly 11% in after-hours trading on Monday following solid Q3 numbers.
Hastings Warns on NFLX Surge
The stock rally continued yesterday with 9.6% gain in early trading session, reaching an all-time high of $389.16. But the caution from CEO, Reed Hastings, eroded all the gains and the stock was down nearly 9% at the close.
Hastings expressed concerns that the shares were riding on ‘a wave of euphoria’. Further, the activist investor Carl Icahn has booked huge profits by selling more than half of its stake in Netflix.
This move sent the stock in the red at the close, indicating an attractive entry point for the long-term investors. Netflix currently has a Zacks Rank #1 (Strong Buy), suggesting that the bullish trend can definitely continue in the near future (read: Buy This Top Ranked Tech ETF Now).
ETF investors have also benefited from this surge, including the following three targeted ETFs which have hefty allocations to NFLX:
ETFs in Focus
Many technology ETFs having higher allocation to Netflix are in focus. Investors should closely monitor the movement in these funds and grab any opportunity from a surge in the NFLX price (see: all the Technology ETFs here).
First Trust ISE Cloud Computing Index Fund (SKYY - ETF report)
This fund provides exposure to the cloud computing securities by tracking the ISE Cloud Computing Index. The ETF has amassed only $135 million in its asset base while it sees low volume of under 38,000 shares a day. SKYY has a 0.60% expense ratio.
Holding about 39 stocks, the product is moderately concentrated in its top 10 holdings. Netflix occupies the third position in the basket, accounting for 4.17% of total assets. Software firms dominate this ETF, accounting for nearly two-fifths of the assets while Internet software services (24.73%) and communication equipment (13.06%) round off to the next two sectors.
The fund is up about 27% in the year-to-date time frame and has a decent Zacks ETF Rank of 3 or ’Hold’ rating with ‘High’ risk outlook (read: Behind the Surge in the Cloud Computing ETF).
PowerShares Nasdaq Internet Portfolio (PNQI - ETF report)
This fund follows the Nasdaq Internet Index, giving investors exposure to the broad Internet industry. The fund holds over 80 stocks in its basket with AUM of $194.8 million while charging 60 bps in fees per year. Like SKYY, this product also sees light volume of under 38,000 shares a day.
The ETF is heavily concentrated in the top 10 holdings with NFLX taking the eighth spot at nearly 4%. In terms of industry exposure, Internet & mobile application make up for two-third share in the basket, followed by Internet retail and software & programing.
PNQI added nearly 53% so far this year and currently has a Zacks ETF Rank of 1 or ‘Strong Buy’ rating with ‘High’ risk outlook.
First Trust Dow Jones Internet Index (FDN - ETF report)
This is one of the popular and liquid ETFs in the broad tech space with AUM of over $1.7 billion and average daily volume of nearly 240,000 shares. The fund tracks the Dow Jones Internet Composite Index and charges 57 bps in fees per year (read: 3 Internet ETFs Leading the Tech World Higher).
While the top 10 firms dominate the fund’s return with 56% of FDN, Netflix is the ninth firm making up for just 3.56% share. The Internet and mobile segment account for more than half the portfolio, followed closely by Internet retail at 23% of assets. The rest of the portfolio provides a nice mix in a variety of related industries including software and communications.
The product surged nearly 42% year-to-date and has a Zacks ETF Rank of 1 or ‘Strong Buy’ rating with a ‘Medium’ risk outlook.
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