I’ve said it before, and I’ll say it again: when it comes to Netflix (NASDAQ:NFLX) stock, follow the content. In the summer of 2016, NFLX had a very strong original show, Stranger Things, and Netflix stock rallied. Since then, NFLX stock has followed a simple pattern. When the company’s original content slate is strong, the platform attracts more subscribers. Netflix stock trades based on the number of subscribers to its service. Thus, when the original content slate is strong, subscription numbers are good, and NFLX stock heads higher. The opposite is true, too.
It’s that simple.
For several consecutive quarters following the summer of 2016, Netflix’s original content lineup was superb. The persistent high quality and diversity of its original content enabled its domestic and international subscriber base to increase rapidly. That rapid subscriber growth, in turn, pushed Netflix stock from $100 to $400.
But Netflix’s original content lineup fumbled last quarter. Quite simply, there weren’t any attention-grabbing titles, nor were there that many new releases. Not surprisingly, investors were disappointed by the company’s subscriber growth, and Netflix stock fell.
But those original content struggles appear to be in the rear-view mirror. Netflix’s original content lineup over the past few months, and especially over the past month, has been very good. The strength of Netflix’s original programming will probably enable the company’s subscriber totals to beat expectations the next time NFLX reports its earnings. That beat should push Netflix stock back to its highs over $400.
Netflix’s Original Content Has Been Great
On the TV show front, Netflix has had a very strong showing recently. The second seasons of its original shows, Atypical and Ozark, recently debuted. Both shows have received excellent overall reviews on both IMDb and Rotten Tomatoes.
The second season of another NFLX original show, Iron Fist, also recently made its debut on the streaming platform. According to reviews on both IMDb and Rotten Tomatoes, the second season of the show is actually better than the first season. Meanwhile, the first season of Insatiable was well-received by fans on Rotten Tomatoes, while the first season of Disenchantment got great reviews from fans on IMDb.
Although Netflix is known more for its shows than for its movies, the streaming company has actually produced some hit movies recently. The movie making the most headlines is To All The Boys I’ve Loved Before, which received high ratings from fans on both IMDb and Rotten Tomatoes. But that wasn’t the only Netflix original film which made a splash recently. Sierra Burgess Is A Loser is one of the most popular movies on IMDb right now. It is trending significantly higher as of this writing. Meanwhile, The After Party got high scores from fans on Rotten Tomatoes.
Overall, as a Netflix subscriber and a longtime follower of NFLX stock, I think this quarter’s original content slate has been pretty good and diverse. Headlined by the second seasons of Atypical and Ozark and the surprise original movie To All The Boys I’ve Loved Before, I think Netflix originals have generated enough buzz this quarter to accelerate its subscriber growth.
Netflix Stock Could Break Out on Strong Subscriber Numbers
NFLX stock trades based on subscriber numbers. When subscriber numbers beat expectations by a large amount and NFLX provides healthy subscriber guidance, Netflix stock rallies. On the flip side, when you get a miss and downbeat subscriber guidance, NFLX stock drops.
Thus, if this quarter’s original content lineup does indeed reinvigorate Netflix’s subscriber growth, as I expect will be the case, then Netflix’s Q3 subscriber totals could beat expectations, and it could raise its full-year subscriber guidance. In that scenario, Netflix stock could break out.
Consider that NFLX stock is more than 10% off its recent highs and is down nearly 10% since its last earnings report, while the S&P 500 is up 3% during that stretch. Also, consider that the recent selloff of NFLX plunged the stock considerably below its 50-day moving average for the first time since its breakout in the summer of 2016. And finally, consider that Netflix stock almost tested its 200-day moving average before bouncing higher, a sign that the shares’ long-term uptrend is intact.
Thus, Netflix stock looks poised to break out on any good news. That good news could be superb Q3 subscriber numbers, powered by its strong original content lineup. As a result, Netflix stock could roar back to $400 in the near-term.
Bottom Line on NFLX Stock
Of all the FANG stocks, I am most worried about Netflix’s long-term outlook, given its competition and valuation risks. But in the near-term, this stock looks ripe for a breakout, considering the recent selloff, its strong original content lineup, and a technical set-up that implies a bullish uptrend.
As of this writing, Luke Lango was long NFLX.