Shares of Netflix, Inc. (NASDAQ:NFLX) have been on fire this year, although some investors wouldn’t touch NFLX stock with a ten-foot pole. It’s volatile and it’s valuation is high. But, you can’t ignore the global dominance Netflix has when it comes to streaming video.
Take it from me — someone who hasn’t owned Netflix stock — this one’s success was hard to miss. With shares currently trading near $145, investors everywhere — again, including me — are kicking themselves for missing out. After all, less than six months ago, NFLX stock was trading below $100. Since then, it’s up a casual 45%.
That’s great for those who have been long. But, are they now staring down a barrel loaded with risk?
Why Netflix Ain’t Your Average Flick
Like we talked about with Tesla Inc (NASDAQ:TSLA) just the other day, Netflix stock doesn’t trade based on valuation. Without a connection to valuation, evaluating NFLX becomes very difficult.
When we evaluated the “FANG” stocks, two were easy — Facebook Inc (NASDAQ:FB) and Alphabet Inc (NASDAQ:GOOGL, NASDAQ:GOOG). That’s because the valuations justify their stock price. The other two, despite being regular components to our everyday life, weren’t so easy. Those two stocks were NFLX and Amazon.com, Inc. (NASDAQ:AMZN).
Instead of trying to buy Amazon, Netflix or Tesla based on valuation, investors have to focus on other catalysts. Put simply, these are story stocks. When the narratives are positive, the stocks do well. When the narratives worsen, they tank.
In Netflix’s case, strong subscription growth and impressive content gets bulls excited. However, poor global expansion execution and a miss on subscriber estimates gets the bears going.
A Closer Look at NFLX Stock
So, if you can’t value Netflix, how do you trade it? How do you justify owning it? It’s simple really. If you believe in the streaming trend, then it makes sense to bet on the leader. Netflix isn’t for everybody, but for those who can stomach the volatility, big gains can be had.
Let’s look at two charts, the short-term and the long-term, starting with the latter.
2-year chart
As you can see, NFLX stock went through a bit of a struggle in 2016. However, it had little trouble exploding higher near the end of the year. Since it rose above $140 in January 2017, though, it has had trouble pushing higher (blue semi-circle). Previous resistance of $130 (blue line) could act as support for Netflix.
7-Month Chart
Looking at the short-term chart, it’s easier to see the consolidation near $140, while support at $130 isn’t so obvious. However, NFLX is sitting right on its 50-day moving average. This same level was tested just a few weeks ago. Generally, the more times a stock tests support or resistance, the more likely it is to break.
With earnings coming up, though, that makes this a tougher trade. Support could completely give way, or it could propel NFLX stock higher.
The Bottom Line for Netflix
An investor who has owned NFLX stock for many months or years is different than an investor making a move now. For active investors, taking some chips off the table is rarely frowned upon. But, should a correction materialize, they have gains to protect against some of those losses.
For new investors, though, buying now could mean trouble. While Netflix seems likely to report another great, exciting earnings report, a disappointment would cause shares to tumble. Given that NFLX stock is already up more than 40% over the last six months, I’d be hesitant to initiate a new position in Netflix.
I know for some this news won’t matter. But, I find it at least a little interesting that its Chief Product Officer, Neil Hunt, and Chief Talent Officer, Tawny Cranz, are leaving the company to pursue other interests. Again, it may mean nothing. But, two departing execs, a stock that’s up 45% in six months and earnings on Monday make me want to take the “wait and see” approach.
NFLX stock could explode to new highs post-earnings. But, it could also have a reasonable pullback even on good results, simply because the stock’s up so much. A pullback to $130 would represent a 10% decline and give investors a defined entry and exit in NFLX.
The 100-day moving average currently sits at $135 and could also act as support should a pullback materialize.
Bret Kenwell is the manager and author of Future Blue Chips. He can be contacted on Twitter via @BretKenwell. As of this writing, Bret Kenwell held no positions in any security mentioned.
