Netflix (NASDAQ:NFLX) stock has slain many short sellers over the years. This was a direct result of its success in establishing a trend that is currently sweeping the globe. Even though Netflix stock is lagging the S&P 500 by ten points year-to-date, there is more upside in the stock from here. NFLX is a momentum stock that moves quickly — blink and you miss it.
Thanks to Netflix, the entire world is now switching to delivering content over the internet. Streaming shows and news is now the preferred way to disseminate content. The days of cable are on their way out. In that, NFLX has the first-mover advantage so NFLX stock should continue to be a buy until most of the competitors that are currently chasing it, like Disney (NYSE:DIS), catch up and in a big way.
Disney is the poster child of all companies that are chasing after NFLX, but in reality there are dozens of them. However, the addressable market is so large that there is room for all of them to prosper for the next decade. Even though Netflix management has had a few flubs, they recovered well from them, so this is a proven team.
However, critics argue that they spend money like fools and they are right. NFLX’s budget for content creation is astonishing. But for now, it’s their ace in the pocket. The bullish thesis for Netflix stock, and the reason why Wall Street allows it to sell at such a high premium, is the fact that they use their content as a magnet to new subscribers. The global expansion is the large future reward for investors today.
Buying NFLX stock here is not for the faint of heart. This is a stock that is very expensive. It sells at price-to-earnings ratio of 120 and 9 times sales. Moreover, there are armies of bearish experts constantly and publicly dissing the stock, which will continue to be a drag on it.
How to Approach Netflix Stock Today
Although I am not a fan of their fundamental setup and its current format, I do see the future potential. NFLX still has some time left before it actually needs to dial back the spending. In other words, the top line has to grow fast enough to ameliorate the financial ratios and silence the critics much like Amazon (NASDAQ:AMZN) did a few years back.
The Netflix stock chart also has clues. This week, the market fell off of cliffs and took NFLX with it to the point that it lost a short-term support level. In addition, it is now below the $300 per share number. This is always a psychological barrier, and to lose it without much fault of its own is disappointing.
But a broken stock chart does not necessarily indicate a broken company, and that is the case here. Netflix is falling with the entire market because of a crisis of sentiment on Wall Street. We are amid a storm of geopolitical headlines and massive moves in the bond markets. These are gigantic and stocks in general go along for the ride.
Netflix stock will find footing even though the bearish downside target from here could be as low as $260 per share. No, this is not a forecast but it’s definitely a scenario that exists today.
Since they don’t ring bells, it’s impossible to find a perfect entry point. If you already own NFLX shares and haven’t sold them yet, don’t do anything for the next few days and see what happens around this zone.
If I’m looking for a long-term entry in NFLX stock, then it’s useless to try to pick the absolute perfect tick to buy it. I can start a position and leave room to add to it overtime.
Those looking to trade Netflix for the short-term should just use the charts and the trigger levels for that. There is no clear support level below, so the Thursday low is as good as any for a stop loss. On the upside, the $300 mark is the obvious pivot. But then there are several ones above that.
The general pattern is a sharp descending wedge. Those usually end in a violent move. So as soon as there is a breakout from the descending trend line of lower-highs, that should invite momentum buyers. From there, I simply follow the levels one step at a time.
Trading actively during a storm of headlines is tricky. Most homework is held hostage to tweets, state media releases and Fed-head statements. So caution is more than warranted until we get relief on at least one of those fronts.
For the long-term, the bullish thesis is still completely alive. We have full employment in the U.S., plus we have the commitment of the Federal reserve to cut rates, and the rest of the world is in full stimulus mode.
Just yesterday we saw Mexico announce rate cuts. The European Central Bank also intends on adding to their stimulus there, so the whole world is committed to keeping this expansion going.
These are uncertain times, so I suggest only risks what you can afford to lose. There’s no shame in sitting this whole mess out. Cash is a position, especially when rates are so low.