Shares of Netflix (NASDAQ:NFLX) have not been trading well. Netflix stock was on absolute fire through the first six months of the year, more than doubling and becoming one of the most valuable media companies in the world. Heck, it was more valuable than Walt Disney Co (NYSE:DIS) despite the latter’s strong balance sheet, theme park business and other strengths.
That luster has been wearing off though. When Netflix reported earnings in July, domestic and international subscribers came up well short of expectations. And even though the last earnings report in October was better, investors remain skeptical. As a result, shares have officially entered bear market territory — defined by a decline of 20% or more from the highs.
As we enter one the more bullish times of the year, seeing Netflix stock — a FANG component important for sentiment — struggling to get off the mat, investors have a right to be concerned. Is this a stellar buying opportunity or a red flag going forward?
Evaluating Netflix Stock
There are certain stocks that I wish I had bought a long time ago. Netflix, Amazon (NASDAQ:AMZN) and Salesforce (NYSE:CRM) are just a few of them. Why? Because the returns are absolutely massive — life changing really, depending on how long ago and how much investors bought.
But I didn’t buy those stocks 10 years ago because the valuations were laughable. To a large degree, they still are. NFLX stock was expensive before this year’s rally, it was expensive a few months ago and it’s expensive now.
I have an issue with the valuation, but it’s not because I value Netflix stock like a traditional company. My problem is its content spending. Specifically, Netflix continues to pour money — to the tune of $8 billion — into making new series, documentaries and movies.
Who am I to critique CEO Reed Hastings’ content decision? After all, content is key to making Netflix a must-have media outlet and with more than 130 million subscribers and plenty of opportunity ahead, that plan makes sense. But it’s a hard plan to get behind when Netflix is going to pull in less than $16 billion in revenue this year.
Spending more than half its sales on content — before accounting for all of its other expenses — is really concerning. And the fact that Netflix continues to rely on debt at a time when the Federal Reserve seems intent on creating a rising-rate environment makes it even more concerning.
The tough part? Imagine 10 years from now. Is Netflix a more prevalent part of the media ecosystem or a less prevalent part? Many of us can agree that the answer is the former. But how we do value that today and what price does Netflix stock become a buy? I wish I had a concrete answer.
Trading NFLX Stock
Ultimately, that’s the problem with stocks we don’t (and can’t) value like traditional companies. On the way up, it leads to breath-taking gains. But on the way down, how we know when the bleeding will stop?
Some stocks — like Amazon and Salesforce — I just shut up and bought it. I waited for the right time on the charts to direct my decision making. On the fundamental front, these are all excellent and revolutionary companies, but from a valuation standpoint, they can induce nausea. That’s why we need to use the charts to guide our way.
So what do the charts say for Netflix?
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Where the 200-day moving average was once support, it’s now resistance. Same can be said for the $320 to $330 level. Its 50-day and 100-day moving averages have been sloped down and are trending lower. Shares are now down almost 30% from the highs and are in, by definition, a bear market.
Even a significant rally over all of these obstacles will likely be met with downtrend resistance (blue line). So what do we do with NFLX stock?
At this point, I’m looking to see if Netflix stock will retest the $270 level. If it does, we need to see if it holds or if it fails. If it’s the latter, look for a test of the $250 level. Should it hold, a rebound to $300 is in the cards.
What if we don’t test the lows? That’s good, as it will mark a higher low. If that’s the case, we’ll have to see how Netflix stock does as it retests recent resistance.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell is long CRM and AMZN.
