You know FANG, right? Facebook Inc (NASDAQ:FB), Amazon.com, Inc. (NASDAQ:AMZN), Netflix, Inc. (NASDAQ:NFLX) and Alphabet Inc (NASDAQ:GOOGL, NASDAQ:GOOG) have been on fire this year. FB stock has done well, up more than 48%. Heck, all of them have done well. But none have done as well as NFLX stock, up a robust 52% so far in 2017.
A strong quarterly result in July catapulted NFLX from $160 to $185 inside of two days. However, after failing several times to get through $190, shares lost momentum, fell through the 50-day moving average and found multi-session support at $165.
Investors are now trying to figure out where the stock goes from here.
Trading NFLX Stock
Click to Enlarge
Addressing the technicals first, let’s take a look at the chart. Netflix has a great looking chart, at least from a trading perspective. It’s easy to digest and its levels stand out very clearly.
For starters, prior resistance has since become support. This is evident near the $165 to $166 level. There’s also light support near $182.50. Resistance is clearly standing at $190. Netflix stock has pulled back several times from this level so far in September. This level also rejected NFLX stock in July.
There is a small “air pocket” on the chart too, between $176 and $177. This is highlighted in purple on the chart. NFLX gapped above this level in July and gapped below it in August. In late-August, it temporarily acted as resistance and then turned to support in early September.
So how do we trade NFLX stock from here? Either $190 holds as resistance or it doesn’t. If Netflix stock is able to break over $190, investors should buy the breakout. If so, a close below $190 can act as the stop-loss. Should it fail to hurdle $190, investors should look for support at three levels: $182.50, $177 and $165. If $165 fails, there’s no clearly marked area for support.
Traders can try initiating a long position in NFLX on a pullback to $182.50 and building that to a full position on each retest of underlying support. Assuming equal purchases, we’d have a cost basis just below $175. A close below $165 (or closely below) would leave us with a loss of 5% to 7%, depending on where investors eventually close the position.
So Where Can Netflix Go From Here?
In a way, it all comes down to subscriber growth. Can Netflix continue to churn out strong sub growth? NFLX spent the first 10 months of 2016 mostly below $100 per share because there were concerns about subscriber growth. Specifically, that the domestic market was becoming saturated and that NFLX’s execution was too sloppy on the international front.
Those concerns (particularly the latter) were legitimate. But too many investors (including me) got caught up on two things: Forgetting these subscriber issues were short term problems, and worrying how far the stock could fall. The fact that NFLX has a huge valuation and fell from $42 to sub-$10 levels in 2012 (on a split-adjusted basis) added validity to those concerns.
But in that mix of panic and hesitation, we forgot just how sticky and good the product was. Netflix might have had sloppy execution and shares may have been overvalued. But we should have known it would be okay because there was no other product that would reasonably pry Netflix out of users’ hands.
Enough with the past, what about the future? Two analysts this week made similar cases. Piper Jaffray’s Michael Olson reiterated his overweight rating and $215 price target. His argument? That domestic subscriber growth should top consensus expectations this quarter, and that its international subscriber count continues to grow impressively. The latter could hit 100 million by 2020, he said.
Buckingham analyst Matthew Harrigan initiated NFLX with a buy rating and $214 price target. Operating margins can expand and global subscriber growth should remain strong, he reasoned.
The Bottom Line for NFLX
Are these two analysts right? Maybe. But the point is, through their channel checks, subscriber growth looks to be strong, perhaps above Street estimates. If that’s the case, NFLX stock is probably going higher. Subscriber growth drives NFLX stock, whether we think that’s right or wrong doesn’t matter.
The analysts’ price targets imply about 15% upside from current levels. However, I wouldn’t buy the stock today, just below $190. I would wait for a pullback or a breakout, but in both cases we have a limited risk proposition.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell did not hold a position in any of the aforementioned securities.
