Shares of Netflix (NASDAQ:NFLX) look to have finally found their footing after a sharp selloff. NFLX stock had fallen by over 33% from the recent highs near $380 in early May. Certainly some of the drop was warranted given the increased competition and slowing U.S. subscriber growth. Although these concerns will have an impact, the impact on the price of Netflix has been overstated.
Look for NFLX to continue to head higher over the coming weeks. The company reported earnings Oct. 16 and handily beat on earnings. Furthermore, it was in-line on revenues.
Initially, Netflix’s stock jumped on the news but subsequently pulled back. Much of the post-earnings angst in Netflix concerned slowing subscriber growth and potential competition from the likes of Disney (NYSE:DIS), Apple (NASDAQ:AAPL) and Amazon (NASDAQ:AMZN).
U.S subscriber growth slowed to 2.1 million net additions for the first 9 months of 2019, although average revenue per subscriber jumped an impressive 16.5%. While Disney and Apple may steal some thunder when they roll out their new streaming services, remember that Netflix has been competing with — and handily beating — Amazon in the streaming space for some time now.
It’s also important to remember that Netflix now has nearly 160 million members, so growth will necessarily be slower due to the sheer size. Even though growth in the U.S. has slowed due to saturation, worldwide growth still remains robust. International growth beat expectations last quarter with 6.3 million new adds versus expectations for 6.2 million. Netflix expects to add a still impressive 26.7 million subscribers overall in 2019.
Netflix stock is looking attractive from a technical standpoint. NFLX held both the 20- and 50-day moving averages at the $280 area. Momentum has turned higher and money flow remains strong but not extreme. Shares have made a series of higher lows after bouncing off major support at the $250 level.
Netflix has formed a bullish pennant formation with a meaningful breakout past the $300 level. This is likely to propel NFLX even higher over the short term.
NFLX Stock Chart
I had a decidedly bullish viewpoint on NFLX in my previous article from late September. I thought that Netflix stock would hold crucial support at $25o and head back initially toward the $290 area. This proved to be the case. Now that NFLX stock has held support once again I look for another leg higher in Netflix shares over the coming weeks.
Stock traders should look to be buyers of Netflix on any weakness. A move back toward the post-earnings gap at $340 would be the initial upside target. A meaningful break of the trend line at the $285 area would be a viable stop out point.
Implied volatility (IV) is at only the 9th percentile in NFLX options. This means option prices are comparatively very cheap. This favors long vol strategies when constructing trades. Option players can play for an upside break out with a call diagonal — buying the Dec $305 calls and selling the Nov 29 $315 calls for $8.
The spread is 33 deltas net long at trade inception or the equivalent of 33 shares of NFLX stock. Maximum risk on the trade is $800 per spread. Ideally Netflix stock closes near $315 on Nov. 29 expiration. Additional shorter-term calls can be sold to further hedge the position if needed if NFLX closes below $315.
As of this writing, Tim Biggam did not hold a position in any of the aforementioned securities. Anyone interested in finding out more about option-based strategies or for a free trial of the Delta Desk Research Report can email Tim at firstname.lastname@example.org.