There are very few stocks where opinions are more bifurcated than Netflix (NASDAQ:NFLX). This is dangerous because most investors are emotionally involved with their trades, which usually causes mistakes. So it’s important to leave emotions out of the decision to trade Netflix stock.
Last night’s reaction is proof of it.
Coming into the report, NFLX rallied 4.5% during the day ahead of the earnings so clearly there is love for it. Then as soon as the markets closed and the earnings headlines came out, Netflix stock fell 9% on the headline.
Within seconds after the drop, it was almost back to even. This morning, NFLX stock made it back into the green for a moment.
The earnings report had a little bit of news for everyone. Netflix beat expectations on sales, earnings and new signup metrics, but it guided next quarter account acquisition a little lower.
If you ask critics, they’d tell you that this report surely makes it an even better short up here. Conversely, the uber fans are now even more committed to its long-term success. To me, both extremes are wrong and somewhere in the middle lies the truth.
But for the midterm, I want to side with the bulls for several reasons. NFLX is not a short yet; stay long Netflix stock or at the very least don’t short it because of this report.
The first reason to stay long NFLX stock is the sentiment. This momentum stock continues to defy gravity in spite of the relentless criticism. The bearish experts offer valid reasons like they once did for Amazon (NASDAQ:AMZN) before it silenced the naysayers for good when it turned a profit.
While NFLX is still not on as solid footing as AMZN, it has a very good chance it will pull it off just the same. Why? The new subscription metrics are astonishing. Last night management reported that they added 9.6 million new paid subs. These alone will contribute roughly $1.5 billion in sales per year.
The critics also argue that the NFLX model cannot continue and they are right. But they have plenty of time to tweak it so that it makes sense. But until then, the only important thing here is the growth.
How to Approach Netflix Stock
NFLX continues to be an uber growth company and when I evaluate those I don’t ask if they are profitable. They are supposed to overspend so they can continue to grow. Profitability requirements come much later in the life cycle. AMZN spent a decade spending too much until they decided it was time to lean down and deliver some margin.
The second reason I want to stay long NFLX stock is my interpretation of the headline price action.
Last night, management delivered bad news with regards to the forward guidance. This on any other stock would have caused a big dip, but not NFLX. It stayed flat late into the evening and now it is green. So if the bears cannot sustain their selling efforts longer than 15 minutes even when they have the headline they wanted, then they have no claws.
Thirdly, NFLX CEO Reed Hastings noted that the reaction to their latest price increase turned out exactly as expected and similar to the last one they did. So this is proof that they have pricing power so churn is not yet a concern.
Moreover, if NFLX can stay above the $340 zone, it can finish its breakout that currently targets $480 per share. This is an upside that is already unfolding on the weekly chart breakout and one that can afford short-term dips.
Ultimately, I suggest that bears should steer away from Netflix stock for now. Regardless of how enticing it is to bet against it, the earnings report shows NFLX has much more upside potential with its global growth and pricing power.
But if you insist on shorting it, you should use puts options. They are cheap and accomplish the same goal. Selling outright short momentum stocks that are this emotional is dangerous, as it carries plenty of risk.
It is also important to note that management is aware of the competitive efforts from Disney (NYSE:DIS) and Apple (NASDAQ:AAPL), but they believe that there is enough room to go around. I bet they are right about that because this is the same scenario as the early days of television when there was room for multiple channels.
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.
