Back in mid-July 2019, Netflix (NASDAQ:NFLX) posted its biggest single-day drop in a year after the streaming giant reported far-worse-than-expected second-quarter numbers. Netflix stock has been sluggish or worse ever since.
At the time, though, I said buy the dip in Netflix for five big reasons, including:
- The global streaming TV growth narrative remains vigorous with only about a quarter of global internet households subscribed to any streaming TV service.
- The second quarter is usually a bad quarter for Netflix, and it’s significantly less important than the other three quarters.
- History, management’s guide, and the summer-to-fall content line-up imply that third-quarter numbers will be much better.
- Netflix still has its secular data and reach advantages, which should help them continue to produce more and better content than streaming rivals.
- NFLX stock had tanked to attractively discounted valuation levels.
Netflix stock proceeded to rebound a bit into the end of July, but that rebound has been replaced by more weakness in August. Specifically, as markets have tumbled on elevated trade war and slowing global economic expansion concerns, NFLX stock has tumbled, too.
Month-to-date, NFLX stock is down more than 5%, and now trades at its lowest levels since early January 2019, when stocks were crawling their way out of a bear market.
But, the five aforementioned reasons to buy the dip in NFLX stock remain relevant and true today. As such, this recent macro-driven sluggishness in Netflix stock is a long term opportunity.
Netflix Stock Is Due for a Rebound
The current backdrop for Netflix implies that this overly beaten up stock is due for a big rebound over the next few months.
Here’s what’s going on. Netflix reported an unusually bad quarter. Investors freaked out. They sold in droves. Some investors came in to buy the dip. That dip-buying was completely wiped out by macro-related selling, which has since dragged NFLX stock down to essentially 2019 lows.
This macro-related selling won’t last. Everyone is apparently concerned about a recession because the bond market is flashing warning signs (inverted yield curve and all-time low 30-year Treasury yield). But, the data doesn’t support this notion.
Thus, all this macro-related selling isn’t based on the fundamentals – it’s based on concerns about what could happen if the trade war gets uglier. But, the trade war won’t get uglier.
U.S. President Donald Trump doesn’t want the trade war to get uglier prior to the 2020 election. China, meanwhile, doesn’t want the trade war to get uglier while there are huge riots in Hong Kong. Both sides want (and arguably need) trade tensions to start cooling off.
They will. As they do, macro-related selling will turn into macro-related buying. That will provide a natural lift for NFLX stock. At the same time, the dip-buying that happened in NFLX stock prior to the August market sell-off shows that there is investor appetite for Netflix at these levels when macro conditions are favorable. That appetite will come back as macro fears back off.
All of this buying will push NFLX stock higher ahead of the Q3 print. That print will be very good (read here to see why). Broadly, it will re-affirm that Q2 was an anomaly and that the growth trajectory at Netflix remains robust. Netflix will consequently soar on that print.
Net-net, it increasingly looks as if Netflix will bottom here around $300 in mid-August, and start to trend meaningfully higher over the next few weeks and months.
Netflix Will Break Out In 2020
Zooming out, even if NFLX stock does trend higher over the next few weeks and months, the stock has been stuck in a sideways ~$300 to ~$400 trading pattern since early 2018.
Why? Because everyone is concerned about Disney+. If there is one company in the world that can compete with Netflix in the streaming world, it’s Disney (NYSE:DIS), because they own a treasure trove of content which is arguably second to none in the world.
Disney’s new streaming service has been “in the works” for the past several years, and the rumored build-out of this service has forced investors to ask a ton of questions. Specifically, how will Disney+ impact the Netflix growth narrative? Will Disney+ steal subs? Will people quit Netflix?
Those questions don’t have any answers. Yet. And this uncertainty has ultimately put a cap on NFLX stock.
But, Disney+ set to launch in late 2019. Thus, all those questions will get answers in 2020. Those answers will either cause Netflix stock to crash (if Disney+ steals subs), or cause Netflix stock to soar (if the Netflix growth narrative continues without any friction).
I think the latter. The reality is that Netflix and Disney have different types of content – Netflix is all about shows (and lots of them), whereas Disney is all about movies (and really good ones). Consumers want both. They’ve also expressed a willingness to pay for both. Netflix has more than 150 million paying subs, and Disney always dominates the box office (especially this year). Both Netflix and Disney+ are also really cheap – much, much cheaper than a traditional linear TV package – and paying for both at the same time is still way less than paying for cable.
As such, the most likely outcome is that both services grow side-by-side for many years to come. As the data starts to support this thesis in 2020, NFLX stock could finally break out of its multi-year trading range.
Bottom Line on Netflix Stock
The plain and simple here is that recent sluggishness in NFLX stock is a long term opportunity. Macro-selling will turn into macro-buying. That macro-buying will turn into a big post-Q3 pop. And that big post-Q3 pop will flow into a 2020 breakout as the data starts to confirm that Netflix will continue to grow at a robust trajectory, even in the face of new competition.
Net-net, then, Netflix stock has a visible pathway to meaningful upside from currently depressed levels over the next 12 months.
As of this writing, Luke Lango was long NFLX and DIS.