Netflix (NASDAQ:NFLX) is always a controversial stock. It has struggled to retake the $400 level for the past year, but this is perhaps more a function of a nervous Wall Street than a problem with Netflix’s outlook.
This is a momentum stock, and when there is a lot of uncertainty in equities, investors avoid such risky bets. But that is why stocks like Netflix are exciting to trade — they move fast in either direction. It’s up 47% year to date, which is twice that of the S&P 500. And I’d like to look at the breakout possibility that could send it to $480 per share.
The Setup in NFLX Stock
This is not the first time this setup has threatened, and so far it has failed to materialize. But this time it is different because sentiment on Wall Street has changed and the bulls are back in control.
Now that investors know that the Federal Reserve is dovish, stock prices are climbing the wall of worries. The economic data is arguably deteriorating, but not by a lot. Regardless, bad economic news nowadays could be good news for stocks because it will spur Jerome Powell to cut rates — maybe as early as July. And if that’s the case, the S&P 500 will keep setting all-time highs and Netflix stock will finally make this breakout happen.
Moreover, we are fast approaching another earnings season, and this too may serve as a launching pad for Netflix. Often investors pile into the stock as it approaches the earnings events.
Fundamentally speaking, I’m not a fan of Netflix’s current setup. They still spend too much money on content, and more importantly, they have massive competition coming. Most notably Disney (NYSE:DIS) will release its streaming platform soon. And judging by the stock price there, it will be a popular one.
But as popular as DIS stock’s platform will be, it won’t kill Netflix’s entire advantage. There is room for both of them with such a massive addressable market. Nevertheless margins are already thin for Netflix, and cheap competition makes it that much tougher to compete.
So far, the ace in the Netflix management pocket is the concept of global expansion. So as long as they keep growing overseas, Wall Street continues to give them a pass on profitability. Otherwise it would be hard to justify its current valuations. It sells at a 134x trailing price-to-earnings ratio and 10 times sales. These are bloated statistics if not for the expectations of hyper growth to continue.
Netflix is a controversial stock with passionate fans and critics, and they will continue to fight it out. Each side presents valid arguments, but the extremes are always wrong and somewhere in the middle lies the truth. This is an innovative company that disrupted how the world consumes media.
It has a huge first-mover advantage, but that also makes it an even bigger target. And they are coming — the competition has the money and technical know-how to get it done. Disney even has a massive library of content to deploy. Under the leadership of Reed Hastings so far, Netflix has shown that the management is up to the challenge. But they cannot blink, because it’s a long fall below.
Nevertheless the write-up today is about a specific opportunity, and I would consider this a tactical trade more so than a fundamental investment. However if somebody believes in the long-term prospects of the stock, the setup here would definitely serve them well as a great entry point for the long-term hold of Netflix stock.
If the bulls can take NFLX stock above $388.50 per share, they will then attract more momentum buyers to trigger the breakout. But it is important to note that markets are at all-time highs, so the odds of dips increase. Therefore tactical traders should use tight stops so as not inadvertently to turn this trade into an investment.