Netflix (NASDAQ:NFLX) has so far been a major disruptor of the media sector. They changed the way the world consumes content. First they changed how we rent movies, then they showed us a new way of watching by streaming online. NFLX stock soared on its growth prospects.
As a result, traditional media companies are now scrambling to catch up so they don’t become irrelevant. In essence, Netflix did to media what Amazon (NASDAQ:AMZN) did to retail. But here, the competition is striking back quicker than the brick and mortar stores did to AMZN.
The victim companies like Disney (NYSE:DIS), Viacom (NYSE:VIAB) and AT&T (NYSE:T) acted fast. They are now in control of the cord-cutting problem. There were also beneficiaries from the NFLX revolution like Roku (NASDAQ:ROKU).
Upside Potential in NFLX Stock?
Last time I wrote about the upside potential in Netflix stock, the rally lasted two days. But once it lost support at $290 per share the target immediately became $260 as the measured move. Now NFLX stock is in the mid $250’s so it is likely that it finds some support here. This is the zone from the Christmas market-wide correction.
It is also important to note that Netflix stock is still frothy. This is a company whose traditional fundamental metrics are bloated. The only reason why Wall Street has given it a pass on profitability is its global growth potential. But that also has been an iffy proposition. So on this next earnings report, NFLX management better deliver a strong argument on that front else the pain is not yet done.
But for a trade there are levels to bet on for the near-term with tight stops. I am leery of the growth story overseas especially with so much competition on its heels. Of late, the rhetoric on that front has been very bearish. It seems that the experts are ganging up on it almost like they did to Nvidia (NASDAQ:NVDA) when it hit $290 per share. It was a must-own stock until it wasn’t. Then the sellers couldn’t get out of it fast enough. The same has happened here to NFLX and only management can change that negative sentiment.
However, I am not very hopeful on that front because until now, NFLX CEO Reed Hastings has come across as too confident and flippant towards his competition. This attitude, if true, puts Netflix at risk to get blind-sighted. Maybe this time Mr. Hasting feels the heat that DIS, T, AAPL and VIAB are bringing on and he is ready for them.
The NFLX Stock Sequel Story Is in the Making
Click to EnlargeThe levels are clear. NFLX stock should find support at $250. But if they lose the December low then the next major pivot level is not until around $215 per share. Traders should keep tight stops in order to avoid another leg lower. Yes, it has fallen a lot from the 2019 highs, but only now that NFLX stock is back to flattish on the year.
The bulls left a 40% year-to-date rally collapse and onus on them to prove that they can stop the slide above the December lows. Otherwise, the sellers are still in control.
The bearish argument against Netflix stock price is easy. It sells at seven times sales and its traditional profitability metrics are out of whack. They have to prove to Wall Street that they have a path to a more sane valuation or that they can still astonish us with their growth.
DIS streaming service is coming online soon and it will be popular. I bet that it won’t take away from NFLX clientele as they have a different audience. Apple (NASDAQ:AAPL) has also announced its streaming service but at $5 per family, I doubt that they will have content that could compete with Netflix’s $18 billion yearly budget.
The bottom line is that NFLX stock is in trouble and only management can save it. They need to show investors that the company is alive and well and that they are aware and have plans on how to handle the competition. Investors will flock back into the stock but they will need a reason soon.
Since sentiment has become so bad, there could be a short covering rally going into the earnings. If so, then traders who bet on NFLX now better lock those profits in before the event. The reaction to earnings is always binary so they become more gambling than investing. The call today is not a fundamental bet on NFLX. This is a trade opportunity in the NFLX stock price more so than a bet on improving outlook.
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. Join his live chat room for free here.
