Shares of Netflix (NASDAQ:NFLX) seem to have finally found their footing after a sharp selloff. Netflix stock shed nearly 25% after reaching all time highs at the $420 area in late June. Certainly, some of the drop was warranted given the runaway rally in NFLX stock in the first half of the year. But at this point, the selling has gotten way overdone, especially given the recent blockbuster subscriber growth numbers. Look for Netflix stock to head higher over the coming months.
Netflix reported earnings after the close on Tuesday, with earnings of 89 cents easily surpassing estimates of just 68 cents. Revenues came in as expected at $4 billion. Subscriber growth, the most widely followed metric, was a massive beat. Net subscriber adds soared to almost 7 million versus expectations of just over 5 million, with the vast majority coming from overseas. The company expects to add over 9 million new users next quarter. So growth remains strong, to say the least.
The company also looks to have finally tempered the cash burn rate, with $3 billion in expenditures this year coming in well below previous guidance of $4 billion. The ability to reign in costs while still maintaining strong growth bodes well for Netflix turning cash flow positive sooner than later. CFO David Wells reiterated that in the earnings conference call, stating “Netflix is approaching a point where the growth in operating profit is going to grow faster than our growth in content cash spend. And that’s really going to drive the free cash flow towards improvement.”
Netflix stock has never traded on valuations, so technicals become an even more important part of the overall analysis. NFLX once again held major support at the $310 area, bouncing sharply off that level. 9 day RSI reached oversold readings that had marked significant short term lows in the past. MACD also reached extremes and is poised to generate a buy signal on any further strength.
Netflix stock has given back virtually all of its post earnings pop after trading up to the resistance area at $380. The ability to buy a stock at the same price it was at following a strong earnings report provides a layer of reassurance. I would look to add Netflix stock to the portfolio at current levels with a short term upside profit target at the $380 level. A meaningful break below the $310 support line would serve as a stop out area.
Tim Biggam may hold some of the aforementioned securities in one or more of his newsletters. Anyone interested in finding out more about Tim and his strategies can go to https://marketfy.com/item/options-and-volatility.
