In 2018, Wall Street headlines made it almost impossible to trade stock fundamental with confidence. Buyers pulled back on deploying risk for fear of the next headline. But this year Netflix stock (NASDAQ:NFLX) was the unlikely candidate to buck the trend as it led the 2019 equity charge.
The stock rallied 15% and today broke the $300 per share mark. Last year the stock fell out of favor as it collapsed 40% from its highs. Even when it finally reported a strong quarter last fall the celebratory rally failed in a massive way.
The failure was not because Netflix stock’s fundamentals had suddenly deteriorated but more so that Wall Street’s mood had soured. Investors had a crisis of sentiment where a slew of headlines plagued the ticker tape. We had China worries, rising rates, deteriorating conditions in some sectors like housing, and more recently a defiant Federal Reserve .
But last week one of those problems was temporarily resolved. Fed Chairman Jerome Powell finally said what investors wanted to hear. He is indeed watching the data, and their trajectory is not set in stone, not even the actions on the balance sheet.
Moreover, this week the U.S. and China have delegates meeting over their tariff negotiations. The public rhetoric from the two countries which includes presidents Trump and Xi has also moderated a bit. Most headlines now mention some sort of resolution as an outcome to the negotiations.
So now investors can at least somewhat go back to trading company fundamentals rather than macroeconomic and geopolitical worries. Netflix stock is on their buy list and justifiably so.
The Netflix stock bull thesis has never been set on current solid financial arguments. The exuberance is over global growth. And concerns over slowing global economic growth made NFLX less attractive to investors. But now that we have fewer worries, traders can go back to overlooking the short-term balance sheet issues and buy back into the long-term global expansion of Netflix.
It has competition and none more so high-profile than Disney (NYSE:DIS). Last year the House of Mouse severed its ties with Netflix and is in the process of launching its own streaming service. It will be a serious competitor and it’s not alone. Alphabet (NASDAQ:GOOGL), Amazon (NASDAQ:AMZN) and Facebook (NASDAQ:FB) are also competitors after the Netflix pie. There are dozens more in tow.
This is a hyper growth company, which means that it relies on continually delivering sign up stats to wow Wall Street. So far they have been able to do so. For the long-term, NFLX has a big enough head start that it will maintain its dominant position in the field.
All media consumption will be online. This is an irreversible trend and, just like the cloud, media consumption will move and remain online forever or until the next wave hits. Netflix had the right idea, and management successfully convinced the world that this is a better way of doing business.
Skeptics have been proven wrong from the business model perspective. But now there are still many who question its financial viability. Management is extravagant in its spending on content but that is a big part of its attraction. They do produce attractive content so the people flock to it and sign up to Netflix services.
Eventually they will find a balance between cost of production and financial viability and for as long as it is cheap to borrow money the model will work. Rising rates is a worry but they are not going too far too fast. Concerns about inverting the yield curve will cause the Fed to stop raising rates this year.
The company has a few more years to go before costs hit a critical level. Until then Netflix stock remains a good investment for the long-term. The assumption is that they have a huge footprint in the online streaming business and unless they make a colossal mistake they will remain a gigantic player in the field. This is a proven management team with strong leadership so they deserve the benefit of the doubt.
This is a momentum stock so it moves fast in either direction. This was evident and how fast Netflix stock lost its market cap last year. But it also runs fast in the other direction as we just saw last week.
Netflix is worth the risk for at least the next six months. These are still turbulent times in the market and we are still in headline mode so it is best to enter partial positions at one time. It is important to leave room for error in case prices goes the other way.
Technically, NFLX stock is testing prior failure levels but those are also opportunity spots. Buyers will reenter the chase if they see the levels taken out.
Click here and enjoy a free video and more of my market thesis and get an ongoing free copy of my weekly newsletters. Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on Twitter and Stocktwits.
