Netflix: Love the Service, But Our Tools Told Me When It Was Time to Sell

By TradeSmith Editorial Staff

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When Reed Hastings was fined $40 by Blockbuster for a late return of “Apollo 13,” he knew there was a need for a better experience in renting movies.

Along with Marc Randolph, Hastings founded a DVD sale and rental company in 1998 with 30 employees and 925 titles.

Today, that company now has 17,000 global titles, more than 9,000 employees, and the most paid subscribers of any video-streaming service (221.8 million), and it’s worth $93 billion as of this writing.

Of course, I’m talking about Netflix Inc. (NFLX), a company I love as a customer.

But here’s the thing…

Just because you love a company and the products and services it offers does not justify investing your hard-earned money into it.

Love alone wasn’t enough to stop the stock price from dropping 35% on April 20 after investors were scared by what the company shared in its Q1 2022 earnings report on April 19.

What you need are tools that can identify when it’s time to buy a stock and when there could be trouble ahead, signaling exactly when to cash out.

Tools like our Health Indicators.

I’m going to have more on them in just a bit, along with how to use those tools to your advantage.

But first, let me provide a few more details about why the Netflix stock price had a double-digit drop in a single day.

Netflix Subscriber Miss Fuels Panic Selling

Netflix predicted it would add 2.5 million new net subscribers for Q1 2022. Analysts were even more bullish, predicting 2.7 million new net subscribers.

In fact, during the same period a year earlier, Netflix added 3.98 million new subscribers.

That right there puts the quarter into perspective: from adding nearly 4 million new subscribers in Q1 2021, to losing 200,000 in Q1 2022.

Netflix projected another drop, anticipating losing 2 million more subscribers in Q2 2022.

As a quick note about the financials, comparing Q1 2022 to the same period one year ago, Netflix increased revenue 9.8% to $7.87 billion.

Net income was strong, at $1.6 billion, but down from last year’s $1.7 billion for the same quarter.

Earnings were down 5.87% from the same quarter last year, but earnings per share still beat market projections, coming in at $3.53 per share. And free cash flow topped last year by 15.9%, amounting to $802 million.

The numbers missed on a few expectations, but the company made a lot of money. However, the focus was all about the unexpected drop in subscribers.

And the executive team doesn’t expect the bleeding to stop any time soon…

What Went Wrong

Hastings, the co-CEO, pointed to four major areas to explain the subscriber growth issues at his company:

  • No Control: Growth depends on factors not entirely under the company’s control, such as the number of broadband-enabled homes, the uptick of connected TVs, the availability of on-demand services, and data costs.
  • Account Sharing: 45% of users, or 100 million homes (30 million in the U.S. and Canada), are estimated to be viewing Netflix for free because of account and password sharing by the 222 million paid subscribers.
  • Increased Competition: In the last three years, new streaming services have arrived from traditional entertainment companies, like Disney, and other broadcast television providers, like Paramount, Warner Bros., and others.
  • Macro Factors: Sluggish economic growth, increasing inflation, geopolitical events such as Russia’s invasion of Ukraine, and continued disruption from COVID-19 have made an impact.

Fixing the Issues

Netflix unveiled a three-part strategy to make investors feel more confident in the company.

The primary approach focuses on improving the overall quality of its programming and recommendations, which it says is what members value most.

Said Hastings, Netflix is doubling down on “story development and creative excellence,” represented in recent hits like “Bridgerton,” “Inventing Anna,” “The Adam Project,” and “Don’t Look Up.”

Second, Netflix will focus on how to best monetize account sharing, suggesting the nearly 100 million additional households already enjoying Netflix off of someone else’s account represent tremendous “short to mid-term opportunity.”

And the company is already taking steps to do this. As a trial in March, Netflix released two paid sharing features to allow members to pay for other households in three markets in Latin America.

Netflix is also floating a lower-priced ad-supported tier to launch in the next 18 to 36 months. This move has encouraged at least one analyst, Laura Martin of Needham & Company, to upgrade her rating from “Underperform” to “Hold.”

Finally, Netflix plans to broaden its scope for growth outside the U.S. It will start by enlarging the pool of creators with which it collaborates, producing films and TV in more than 50 countries.

The company pointed to non-English-language monster hits like “Squid Game” and “All of Us Are Dead” as proof of the viability of its plan.

Under The Lens of TradeSmith

Our tools at TradeSmith indicated Jan. 21 was an optimal time to sell NFLX when it entered our no-go, get-out-now Red Zone.

According to our Health Indicator, NFLX had a pretty good run, entering the Green Zone on March 30, 2020, at $370.96. It rose as high as $691.69 (an increase of 86.46%) by Nov. 17, 2021.

Then NFLX began to fall, exiting the Green Zone on Jan. 5, 2022, and continuing a downward trek until our system signaled the stop loss was met on Jan. 21.

Even if you would’ve waited until the very last minute to get out, on Jan. 21, you still would have come out ahead, with a gain of 7.15%. Of course, you may have invested in Netflix even earlier, and by following the stop-loss signal, could have netted quite a handsome profit before the downturn.

Right now, the stock is in the Red Zone, and we are waiting for a new Entry Signal.

NFLX volatility is in the medium range, registering a Volatility Quotient (VQ) of 30.71%. Interestingly, the shocking price drop exceeded the normal VQ by only a few percentage points.

So, what do you do from here?

While we still see a downtrend, that may be short lived, as our Timing indicators suggest the stock is in a valley, at least for the next few days. That’s typically a bullish sign, and our friends at LikeFolio also rate this stock as bullish, so it could turn around quickly.

Just like the signal to sell, our tools can also indicate when to buy back in to NFLX.

Our programs highlight optimal entry points all along the investor spectrum, flashing Early Entry Signals for the aggressive investor or displaying a green Health Indicator for the more conservative.

Putting It All into Perspective

With Netflix, we have an incredible story of visionary founders seeing a problem and bringing the world a solution, and that’s why Netflix still has more than 221 million subscribers.

It’s easy to use, and you can watch almost any movie or television show you can think of.

But it’s also a story that won’t make you money on its own.

I may be turning to Netflix to watch the new season of “Stranger Things” on May 27, but I’m only turning to TradeSmith tools to know when it’s time to buy or sell NFLX stock.

Did you sell Netflix stock back in January? Are you still holding for the long term? Email and let me know.