3 Reasons to Buy the Dip in Netflix Stock

What can we say about Netflix (NASDAQ:NFLX) other than that the stock has been on fire? Not only did NFLX stock brush off the impact of the coronavirus, but it rallied to new all-time highs.

NFLX Stock: 3 Reasons to Buy the Dip in Netflix Stock 

Source: Riccosta / Shutterstock.com

Do you know how incredible that is? The S&P 500 fell 35% from peak to trough in the span of one month. Some entire bear-market declines are 35% and can take months to play out.

Of course, the market isn’t out of the woods yet. But for Netflix stock to surge to new highs amid the selloff has to have investors’ attention. Since reporting earnings. though, NFLX stock has struggled. However, rather than give up on it, let’s look at why investors should stick with this stock.

Streaming Is on Fire

By now, it’s no secret what consumers are up to: They’re shopping online and streaming video. When Netflix reported earnings, analysts were expecting just 8.5 million new subscribers in the quarter. The company blew past that mark, though, nearly doubling it with 15.77 million new subs.

Disney’s (NYSE:DIS) recent report shows more than 54 million Disney+ subscribers despite just launching in November. So with that in mind, we can only imagine what Roku (NASDAQ:ROKU) will say when it reports earnings.

The streaming game is strong, and the novel coronavirus is only adding fuel to the fire. While Netflix management did say that the current environment likely pulled forward some subscribers — doing their best to temper expectations — it doesn’t matter in the long run. That’s because streaming is a secular trend, and as subscriptions grow, so does Netflix.

For those that argue about Netflix’s standing amid a recession, I actually believe it will benefit from an economic contraction. With its low price point, it’s convenient and affordable for those with limited income. That should shield it from any economic fallout we see as the result of the coronavirus and even benefit the company.

NFLX Stock Chart Looks Great

chart of NFLX stock
Click to Enlarge

Source: Chart courtesy of StockCharts.com

Despite reporting solid earnings, NFLX stock reacted as a sell-the-news event. However, when it checked back to its prior resistance area near $380, shares reversed higher. In doing so, Netflix reclaimed the 20-day moving average and so far, is holding over the prior highs near $420.

Some investors may look at this chart and say Netflix is forming a lower high after failing to rally on earnings.

That could be true — particularly if it times up with a market-wide correction. However, it’s also possible that NFLX stock is forming a bull flag, a bullish technical pattern. That’s when the stock consolidates its recent gains before resuming its move higher.

Should Netflix rally, look to see if it can get back to $450 and hit new highs. Remember, Netflix is the best performing FAANG stock. It’s a two-horse race between it and Amazon (NASDAQ:AMZN), but so far, these two are leading the pack.

You know what they say: leaders lead.

Business Is Improving

The debt situation with Netflix is among the biggest concern for many investors. When I say debt, yes, I’m talking about the $14.7 billion it carries on its balance sheet. But as a whole, I’m talking about its financials.

When you look at FAANG, you’ll see that stocks like Facebook (NASDAQ:FB) and Alphabet (NASDAQ:GOOGL, NASDAQ:GOOG) carry virtually no debt. Others have robust cash flow and powerful balance sheets. Meanwhile, Netflix doesn’t.

It has the worst cash flow, the lowest quick ratio (measuring balance sheet strength) and one of the highest valuations.

Despite all that, though, business is booming.

The company easily tapped nearly $1 billion in a new debt offering, showing it has easy access to capital. With its latest subscriber addition, it now boasts over 182 million subscribers globally. In June 2019, Netflix came up just short of $5 billion in revenue for the quarter. In the most recent quarter, it had $5.77 billion. This is a subscription business. So month after month, Netflix is cashing checks.

Overall, while the cash burn and debt is disappointing now, keep in mind that Netflix is building a content empire for years and decades to come. Its business model is virtually recession proof, and we’re seeing that now. It’s been a mistake to bet against NFLX stock thus far — and over the long term, that will continue.

Matthew McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. The power of being “first” gave Matt’s readers the chance to bank +2,438% in Stamps.com (STMP), +1,523% in Ulta Beauty (ULTA) and +1,044% in Tesla (TSLA), just to name a few. Click here to see what Matt has up his sleeve now. Matt does not directly own the aforementioned securities.

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