Shares of Netflix (NASDAQ:NFLX) have been in the house of pain, as the stock price continues to cascade lower. NFLX stock is the worst performing FAANG component in 2019 and over the last year, while its chart continues to look dreadful.
As the streaming wars heat up, it has some investors wondering if Netflix stock will ever be a buy again.
Given the secular theme that is streaming video, this industry is only going to get bigger over time. As a result, I suspect that Netflix stock will become a buy at some point in the future. In other words, it’s a more of a “when” not “if” situation.
However, when the valuation is high, investors need to see momentum in the business and strong technicals on the charts. With NFLX, we have neither.
Streaming Wars Heat Up for NFLX
Streaming video is a secular trend and it’s what has driven NFLX stock so high over the past decade. Even amid its slump, shares are still up an astounding 4,000% over the last decade.
As other streaming platforms entered the fray, many argued that it helped Netflix, as it helped drive consumers to cut the cord. However, with Amazon (NASDAQ:AMZN) now in the field, and with Disney (NYSE:DIS) and Apple (NASDAQ:AAPL) entering the mix, that argument is holding a lot less water.
The fact that Disney and Apple are undercutting Netflix on price doesn’t help, nor does the fact that Disney has superior content quality. Netflix’s recent price hike only adds salt to the wound in this sense, as does the platform losing its top-two shows in 2020 as Friends and The Office head to other platforms.
Just because we have Disney, Apple and others in the mix does not mean there’s no place for NFLX. Netflix is a staple among streamers. But it finally has some formidable competition and that’s not good news for the company, (although it’s great news for a company like Roku (NASDAQ:ROKU)).
Valuing Netflix Stock
Last month, we looked at Amazon and observed that it is one of the worst-performing FAANG components. The other is NFLX.
It was clear that the companies with the strongest balance sheets and lower valuations were performing the best. Is this some kind of rotation to safety move among the group? Are investors gun shy about higher valuations?
The answer isn’t totally clear, but the “why” doesn’t matter so much as the “what,” which is that higher valuation stocks are currently out of favor.
On multiple metrics, Netflix has the weakest financials and the highest valuations. Never mind that the company generates negative free cash flow, while its FAANG peers generate massive free cash flow sums.
At 106 times trailing earnings, value buyers don’t want it. Based on this year’s estimates, NFLX stock trades at 84 times this year’s consensus estimate of $3.24 in earnings. That’s up about 21% from the prior year.
For next year, analysts expect earnings growth to accelerate dramatically to 74%. On that estimate, NFLX stock trades at “just” 48 times earnings. While still expensive, it’s at least becoming a bit more reasonable.
The problem with an estimate that’s six quarters away? Well, it’s just that: an estimate. In just the last 90 days, estimates for 2019 earnings have come down more than 5%. Heck, estimates for next quarter have come down more than 20% in the last three months.
Being aware of the numbers is one thing. Banking on them to come through is another. With Netflix, there are simply too many concerns to bet on its fundamentals, leaving many to turn to the charts.
Trading NFLX Stock
Like we’ve said before, when the fundamentals and valuation can’t support a stock, it needs to rely on its technicals. In this case, they couldn’t be worse for NFLX stock.
Netflix stock was range-bound for months, stuck between $340 and $380. Investors were looking for the company’s July earnings report to propel the stock into a breakout. Instead, it sent shares into a breakdown.
There’s plenty of resistance currently overhead, starting with the declining 20-day and 50-day moving averages. Then there’s the 38.2% retracement near $290 and the 50% retracement near $308.
On the bright side, NFLX stock broke below then reclaimed the 23.6% retracement. What bulls really need to see now is a higher low. In other words, it’s vital that NFLX stock doesn’t break below the 2019 low of $252.28. If it does, it puts a test of the 52-week lows near $231 on the table.
On the upside, I want to see if it can hold its 23.6% retracement and reclaim the 20-day moving average. Then see how it does with $290.