Subscription entertainment titan Netflix (NFLX) reported outstanding third-quarter results after the close Monday, beating on all lines. In percentage terms, the company’s earnings per share increased 300% year-over-year. The company also announced that its profitability in international markets is improving, and Netflix’s web-streaming service now has more customers than HBO. Those are juicy headlines for sure, and the stock’s initial reaction in after-hours trading on Monday reflected much love as it rallied just about 12% to a fresh all-time high.
But let’s look deeper to see what we can do with this hot stock now.
NFLX stock is no stranger to volatility. A quick glimpse of the multiyear chart of NFLX (below) speaks a thousand words. As I have mentioned many times when going over the charts of Neftlix, the stock has a strong trend-following crowd for obvious reasons. Over the past four years the stock has had three swings the magnitude of which, in percentage terms, rivals only some volatile small and micro-cap stocks.
From October 2009 up to July 2011 NFLX rallied around 500%, before the tide quickly turned and the stock lost 80% of its value in a matter of four months. Then, after a nine-month consolidation phase the stock again began to rally in September 2012, which through Monday’s close had tallied up to just about a 550% breathless sprint. Such is the tale of trend-following/cult stocks — when they run, they really run … and can continue to do so beyond any rational mind’s profit targets.
On the daily chart, note that on Monday NFLX rallied strongly ahead of its earnings announcement, breaking above an already steep trading channel that dates back to March. If Monday’s after-hours trading action was any indication, then the stock this morning could open for trading close to the $400 area.
But be warned — this is no stock to chase to the upside right now. Traders looking to play the stock from the long side would be well advised to let emotions come out of the stock somewhat and wait for a consolidation period to set in. Alternatively, traders privy to options might find juicy premiums to sell far-out-of-the-money calls or calls spreads to collect premium.
Serge Berger is the head trader and investment strategist for The Steady Trader. Sign up for his free Weekly Market Outlook Video here. As of this writing, he did not hold a position in any of the aforementioned securities.