The Third Time’s a Charm for Netflix Stock

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Netflix stock - The Third Time’s a Charm for Netflix Stock

Source: Vivian D Nguyen via Flickr (Modified)

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.

Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.


Article printed from InvestorPlace Media, https://investorplace.com/2018/11/the-third-times-a-charm-for-netflix-stock/.

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