The powerful trend of streaming isn’t unknown to investors. Most if not all are well aware of the sweeping changes in content consumption. With a plethora of options, consumers have a number of platforms to choose from when looking for movies and TV shows.
While Netflix, Inc. (NASDAQ:NFLX) is the most well-known platform, the NFLX stock price isn’t having the easiest time as of late. Just as a number of other tech stocks lost some wind in early December, NFLX stock was no exception. It too suffered, and it now trades at a critical level. Should investors buy now or hold off?
Trading NFLX Stock
In late August 2016, NFLX stock finally made a bottom and began working its way higher. Little did we know shares would return 141% in less than 18 months. Now though, that run is in jeopardy.
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But first, the good news. The major trend line (in green) for NFLX stock is still in place. Shares have continually found support at this level. Second, the MACD is now bullish (blue circle). This indicator measures momentum, and a swing to bullishness is a positive development, as the MACD was bearish for two months.
The negatives? The weaker but still positive blue trend line has failed as support. The waning momentum was finally too much to bear as most of the tech sector came under pressure a few weeks ago. Second, the Relative Strength Index (RSI) measures how overbought or oversold a stock is (red circle). But in this case, it’s making a series of lower lows. That’s not a good sign.
Finally, $190 was resistance from July until October, then support from October until December. A failure to get back above $190 could put the overall trend for NFLX stock in jeopardy. Further, a small downtrend has been found near $195 as well.
So what now?
It’s not all over, yet. NFLX stock will give bulls an early Christmas present if it can convincingly push above the $190 and $195 levels. In doing so, it will also put in a higher low on the RSI reading. If that happens, it will be shocking if NFLX stock price doesn’t go on to print new all-time highs.
(Note: Apologies for the busy chart!)
Fundamentals of NFLX Stock
Netflix is still very much a growth company. Revenue is forecast to grow 32% and 28% this year and next year, respectively. Subscriber growth is the main focus for investors, and execution continues to be great both internationally and domestically. Also on the plus side, Netflix is generating a profit.
Analysts are forecasting earnings per share of $1.25 this year, roughly triple last year’s results. Forecasts call for 2018 earnings to grow roughly 80% to $2.25 per share. Admittedly, NFLX stock still trades at 84 times next year’s earnings. But at least we can value the company on an earnings basis!
The problem with Netflix is cost of content. Management expects to spend upwards of $8 billion in 2018 on content. That’s an astronomical number and more than 50% of revenue. Thankfully, Netflix raised prices on its domestic subscribers by $1/month. Thanks to the stickiness of its product, it won’t suffer a net subscriber loss, allowing revenue and margins to expand.
I personally believe Netflix could charge a similar amount as HBO Go, a product from Time Warner Inc (NYSE:TWX) at $15/month. Even at $12 a month — up 20% from current prices — Netflix is still a bargain.
Content is a double-edged sword, though, and there’s a reason they say content is king. Walt Disney Co (NYSE:DIS) recently announced it will cease its partnership with Netflix and focus on its own streaming
offering. After acquiring Twenty-First Century Fox Inc (NASDAQ:FOXA, NASDAQ:FOX), Disney now owns 60% of Hulu and has more content.
Like it or not, that’s precisely why Netflix has to spend so much. The competition is fierce. Everyone from Disney, Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL), via its YouTube TV offering, and more are coming after Netflix.
The Bottom Line on Netflix
If you’re not long Netflix, let’s keep it simple: wait before buying. Either buy on a test and hold of its green trend line or a breakout over $190 and $195. If support fails, look for a possible retest of the 200-day moving average.
While the financials are far from perfect, the fundamentals are improving. I’m not buying yet, but I’m far from a seller in NFLX stock.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell held a long position in DIS.
