As I write this Netflix (NASDAQ:NFLX) has recovered from its latest correction, which saw Netflix stock drop from $299.83 at the end of last week to a low of $271.21 on Halloween Eve.
Now trading comfortably above $300 as it closes out another week of trading, I’m here to say that if you bought NFLX stock below $280, you’re going to be very happy in 12-24 months. Here’s why.
The First Correction
Netflix was riding high heading into spring after reporting boffo Q4 2017 earnings.
Highlights included adding 8.3 million new subscribers with three-quarters of them outside the U.S, revenue that grew 33% to $3.3 billion and operating income that jumped 59% to $245 million, a margin increase of 130 basis points.
“We had a beautiful Q4, completing a great year as internet TV expands globally,” the company wrote in its earnings release. “In 2017, we grew streaming revenue 36% to over $11 billion, added 24 million new memberships (compared to 19 million in 2016), achieved for the first time a full-year positive international contribution profit, and more than doubled global operating income.”
It’s easy to see why NFLX stock moved more than $100 in six weeks time. Stellar results will do that.
And then it ran out of steam falling back to $275.05 — a 17% correction — by April 2.
The Second Correction
As the saying goes, onward and upward.
Netflix stock began its ascent once more, rising $148 to its current 52-week high of $423.21 — a 54% gain from its April 2 low — in less than three months.
And then the rally ran out of steam on account of lower growth.
Analysts were expecting an addition of 1.23 million U.S. subscribers in Q2 2018; it delivered just 674,000. Internationally, it added 4.47 million subscribers; analysts were expecting 5.11 million.
It was the first miss on subscriber growth in five quarters. A wall of worry began to build, driving its stock from well over $400 to a low of $312.96 six weeks later, a correction of 27%.
The Third Correction
And then came October when almost no stocks were spared any mercy. The S&P 500 lost nearly 25% in October, the worst month in seven years. That’s almost as long as the bull market itself.
NFLX released strong earnings Oct. 16. Despite the good results, NFLX stock lost $111 from its Oct. 1 high to its Oct. 30 low, a 29% correction in exactly one month of trading.
“October volatility is legendary, and we’re not just talking about the crash in 2008,” S&P Dow Jones Indices analyst Howard Silverblatt told CNBC. “October is a much more volatile month than any of the others as far as quick declines go.”
Good riddance, October.
The Bottom Line on Netflix Stock
I’m a fan of Netflix’s business model.
In late August, I suggested that NFLX stock would hit $1,000 within the next five years — that’s as long as its operating profit per subscriber keeps moving higher which it currently is — and nothing’s happened to change my mind.
Netflix’s first significant correction of the year brought a 17% decline and a subsequent 54% gain. The second correction, down 27%, brought a smaller 23% gain.
What kind of gains will come from a 29% correction in October?
Big ones.
As of this writing Will Ashworth did not hold a position in any of the aforementioned securities.