As analysts debate whether broader markets hit bottom with the record Christmas Eve decline, one stock that has had a stellar comeback is Netflix (NASDAQ:NFLX), the leader of the streaming video revolution. Netflix stock went from an intraday low of $233.68 on Dec. 24 to an intraday high of $357.22 on Jan 15.
While I would not bet against Netflix shares longer-term, the stock is unlikely to make any new highs in the next couple of weeks. There might be further short-term profit-taking in the stock, potentially offering investors better entry points if they decide to hit the buy button later in the year.
NFLX Stock and Market Volatility
On Jan. 21, the International Monetary Fund (IMF) warned of a global economic decline as China, the world’s second-biggest economy has been slowing down considerably. The global lender revised down its global forecast second time in three months, from 3.7% to 3.5%.
Earlier in the day, China also released data that showed a slowing economy. President Xi Jinping highlighted the fact that as the country moved towards a consumer-led economy, it faced deep and complicated changes.
In 2018, trade wars between the U.S. and China affected the fate of the financial markets. Therefore the gray clouds that are gathering over China would put further pressure on the financial and commodity markets globally.
Volatile energy prices also pushed oil prices to close to the lows of 2016 when oil was less than $30 per barrel, and Wall Street is now wondering if oil is in a bear market — a fact that would have increased negative implications for the global economy.
IMF expressed further concern over the possibility of the United Kingdom leaving the European Union without a trade deal. Brexit has been complicated both in technical and political terms.
Prime Minister Theresa May lost a parliamentary vote on the government’s proposed Brexit deal on Jan. 15. The UK now finds itself without a clear path forward on Brexit. The only political certainty we have is the official Brexit date of March 29. As things stand, the UK is looking to leave the bloc without a deal.
The UK and European financial markets are increasingly edgy about the outcome we may have on that day. German stock markets have particularly been worried about the stall in the Chinese economy, too, as Germany exports heavily to China. In other words, risks for the financial markets are skewed to the downside.
Many analysts also warn that if the UK crashes out of the EU without a deal, the initial reaction of global stock markets will be a sharp fall. On the other hand, in case of a clear outcome by March 29 that could involve a soft Brexit, consumer confidence in the UK and Europe would stabilize, and the broader markets may stage relief rallies.
In other words, global economic and political conditions are likely to dominate the headlines in the next few months. Unless the broader market remains strong tech stocks are really unlikely to show considerable price strength, possibly until their next earnings release in the spring.
Until we have more clarity on how Brexit will proceed and on how the Chinese economy is holding up among global trade war worries, I would avoid committing too much capital in volatile tech stocks.
Netflix’s Recent Earnings Release
Netflix’s quarterly release on Jan. 17 showed that the company beat earnings with an EPS of $0.30 per share. Although Netflix’s overall numbers were strong, since it cut revenue projections, its price has been going down since the report. As the stock had gone up considerably before Jan. 17, it was not surprising to see profit-taking by shareholders.
With a P/E of 130, Netflix is a growth as well as a speculative stock. Analysts value the stock on an expectation of continued high revenue growth, leading to future profits. Therefore whenever Wall Street fears the company is failing to meet growth or profit expectations, the stock gets penalized.
Currently, the most critical metric investors pay attention to is NFLX’s subscriber growth. This number needs to remain strong every quarter to justify the high valuation.
However, new competitors including Disney (NYSE:DIS), Amazon (NASDAQ:AMZN), AT&T (NYSE:T), and Comcast (NASDAQ:CMCSA) are increasingly entering the content distribution space. Before too long the market might become oversaturated.
If Netflix cannot keep up with the aggressive growth assumptions or increase its prices, especially in international markets, then its margins and the stock price would suffer. As these competitors make their mark in the marketplace in 2019, investors may decide to have a wait-and-see attitude, pressuring the recent price gains.
Shorter-Term Technical Analysis
After a brutal sell-off that started in October, NFLX stock price has increased over 30% over the past four weeks. Shorter-term momentum indicators, which describe the speed at which prices move over a given period, became extremely overbought as a result.
Although these indicators can stay overbought for quite a long time, it was not surprising to see some profit-taking following the earnings report.
In other words, the excessive uptrend we have witnessed over the past month, cannot possibly be sustained. If you believe in the fundamental bull case for Netflix stock, you might consider waiting for a better time to go long, such as around the low-$300’s or even upper $290’s. Expect nearer-term trading in Netflix stock to be choppy at best.
The Bottom Line on NFLX Stock
Markets suffer during times of uncertainty, and the current global environment offers plenty of questions. Netflix stock has a strong story and it remains a long-term growth play. However, there might be a weakness in the NFLX stock price in the near term that investors should anticipate.
In the coming months, I expect the NFLX stock price to be a battleground between investors and traders. While long-term investors would like to see Netflix go towards to the $400 level, traders are likely to keep the range between $295 and $345.
As of this writing, Tezcan Gecgil did not hold a position in any of the aforementioned securities.
