Netflix (NASDAQ:NFLX) has been on fire lately and today is no exception. Shares of Netflix stock are up 1.3% on the day, after surging 6% yesterday. The rally comes after NFLX won five awards at the Golden Globes on Sunday.
I didn’t watch the show very closely, but my wife did, so I heard bits of it at times. At one point, I heard one of the winners thank the “great cast, crew, my lovely wife, [and] Netflix, Netflix, Netflix.”
If that doesn’t underscore a mega-shift in the media space, plenty of other developments do. The fact that NFLX grabbed five Golden Globes, more than any other network or streaming service, certainly does.
The company’s Bird Box hit, starring Sandra Bullock, also underscores the viral power of Netflix’s platform. And as if we needed even more statistics regarding cord-cutting, Roku (NASDAQ:ROKU) exploding almost 25% yesterday after the company said its streaming hours had jumped 68% year-over-year really proves the point.
What has all of this hype meant for the price of Netflix stock? It’s produced big gains for the bulls over the past few weeks.
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After hitting around $230 on Christmas Eve, Netflix stock has shifted into rally mode. NFLX stock has jumped about $90 since then, good for a gain of nearly 40%! The recent move isn’t that surprising after Netflix stock had such a strong breakout.
Hold Your Horses
For investors looking to get long Netflix stock, now is not the time to pull the trigger. In fact, if I had to choose between booking profits and adding to my long position, I’d be locking in gains. NFLX stock is already up nine days in a row, although it’s surprisingly not in overbought territory yet.
For those looking for an upside selling signal, I would love to see if NFLX stock can reach $330. That would put the stock right into an important support/resistance level and place it near the 200-day moving average. That’s a low-risk place for bears to bet on a reversal of NFLX stock and an excellent spot for bulls to take profits, assuming that they want to push their luck for an extra 450 basis points.
Netflix will report its earnings later this month and if last quarter is any indication, its growth should be solid. However, I don’t like when stocks rally into an event like earnings because it increases the odds that the news is already priced into the shares. Often, a flat reaction to the news is the best-case scenario, while a post-earnings decline is more likely.
If Netflix stock drops — say into the 21-day moving average to 50-day moving average area depicted by the chart — going long Netflix stock at that point seems like a good idea.
The Bottom Line on NFLX Stock
My biggest issue with Netflix stock isn’t its volatility or the fluctuations of its user growth. It’s pretty clear that Roku, Netflix and this whole segment is benefiting from a massive shift to online streaming. It’s more convenient, more affordable and overall just a better experience than watching conventional TV. This trend isn’t going anywhere.
NFLX is overtaking the world, but its cash flow is problematic. Put simply, NFLX expects to spend $8 billion on content this year. That’s an insane amount, since Netflix will likely report less than $16 billion of sales this year.
That said, Netflix’s growth remains strong, and NFLX does generate positive net income. If the company had positive free-cash flow, I’d be all over this name. I don’t doubt CEO Reed Hastings’ strategy, but it does concern me, particularly since Netflix uses debt (which keeps getting more expensive) to fund its growth.That may not matter for high-risk investors, but for more conservative investors, it’s noteworthy.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell is long ROKU and AMZN.
