Netflix Shareholders Are Stuck in the ‘Upside Down’ — But Another Reality Reveals the Buy of a Lifetime
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The “Upside Down” is an alternate dimension that exists alongside the characters’ “real world.” Devoid of human life and positive emotions, and with monsters lurking around every corner, it’s somewhere you want to leave as quickly as possible.
But even though you want to leave and didn’t ask to be there, you can get stuck.
A mental lightbulb started to spark… and I realized that this is the perfect analogy for Netflix.
Right now, Netflix is stuck in the “Upside Down” world.
It’s an unpleasant reality that shareholders are trapped in, especially those who may still be holding on to shares they bought for $700. For anyone who wants to invest but hasn’t — no one wants to try to catch a falling knife, as the stock could keep sliding.
Here’s a quick look at Netflix’s unpleasant reality:
- The Netflix stock price has plummeted 63% this year.
- It lost 200,000 users in its last quarter.
- Password sharing could be leading to an estimated 45% of all Netflix watchers using the platform for free.
- And there could be more people canceling their Netflix subscription than signing up for one in the near term.
Yes.
Even trapped in a negative reality, there are plenty of reasons to still like this company.
In 2021, for the first time in the company’s history, Netflix won more Emmys (44) than any other network. That’s a huge validation for excellence in the television industry.
It had six of the 10 most searched for shows in 2021.
And Netflix still has the largest number of monthly active users in the U.S.
To put it simply, this is a giant that won’t be dethroned easily.
On the technical side, there are signals telling me this stock is going to be one you can eventually brag to your grandkids about owning.
Now, when I say that, I’m not telling you to open up your brokerage account as fast as possible and hit the “buy” button on NFLX. Within our system, I want to see Netflix stock hit a few key indicators before sending any hard-earned money its way.
But I do want to share the signals that have formed, and what I’m waiting to be triggered to act on the buy of a lifetime.
NFLX Flexes Its Pricing Strength
Let’s start with pricing power, a measurement of how changing the price of a product affects demand.For example, if a streaming service hikes its prices and subscribers leave the service, signaling less demand for the product, the pricing power is weak.
Netflix has an enviable relationship with its subscribers, having successfully raised prices six times in the past eight years with no appreciable detriment to earnings.
Netflix began raising prices in 2014 and still managed to swell its subscription base from 48 million to nearly 222 million today.
Only in the first few months of 2022 did the company see a hit to its subscriber count, reporting a loss of 200,000 account holders. Estimates up to 10 times that number are projected for the current quarter.
Netflix management quickly asserted they didn’t believe the price hikes were responsible for the dip in subscriber count, pointing to the war in Ukraine, macroeconomic issues in Latin America, seasonality, and even heightened competition as the culprits.
Scarcity of resources is a strong driver of pricing power. Only recently has Netflix had to contend with any serious competition. Netflix CEO Reed Hastings acknowledged the potential threat, doubling down on popular original programming, like “Stranger Things” and “Bridgerton,” to squelch rivals.
Netflix still boasts a lower rate of subscriber loss (about 2.4% monthly) than any of its rivals, including Disney+, Paramount+, and HBO Max.
Short Sellers Take a Pass
Short selling occurs when a trader sells shares of a company they don’t own, hoping the stock price falls. If the price does fall, the traders make money. If it rises, they lose.There is something called “short interest,” which is the number of shares that have been sold short but have not been closed out or covered.
It’s helpful to track the short interest of a stock because it indicates whether investor or market sentiment about the company is bullish or bearish.
If the short interest is high, meaning more investors are betting on the stock to fail, that is a bearish signal. However, if short interest is low, that indicates a bullish inclination.
In the case of Netflix, the stock’s short interest has actually fallen by 8% since its last report. In fact, its total short interest only represents about 1.61% of all outstanding shares available for trading, or its public float.
It can be helpful to compare a company’s short interest percentage with that of its competitors. In Netflix’s peer group, the average short interest percentage of public float is 6.02% — which is more than three and a half times that of Netflix.
As promising as these first two signals are, this next one proves I’m not alone in my favorable long-term outlook…
Analysts Line Up
Benzinga reported that 30 analysts determined that NFLX’s average price target should be $328.63. With the stock currently hovering around $170, this is a very bullish projection.While the price target has been adjusted down from $488, the current target is still well over the current price.
Not So Fast
Taking these three factors into account, we have a lot of reasons to get excited about Netflix right now. Its price is the most attractive it’s been, relatively speaking, in a long while. And that’s where the tiniest concern sneaks in.You see, there’s another important metric that isn’t doing so well: subscriber count. And despite what Hastings and the gang at Netflix say about it, missing their subscriber target is a big deal.
Next month, around July 19 (these dates can always change), Netflix will release its earnings for the second quarter of the year.
It’s already anticipated that the company will lose up to two million more subscribers. But what if it loses even more than that?
Also, what will Netflix’s guidance reveal about Q3? Will the company keep losing subscribers? When does it expect the loss to end?
I will be waiting to see what happens with Netflix’s subscriber counts before making any definite decisions about backing this company.
I’ll also watch the signals within the TradeSmith Finance platform closely. If the price begins rising, a full VQ’s worth of positive movement could trigger an Entry Signal.
Right now, NFLX is in the Red Zone, has been in a downtrend for more than two months, and has a VQ of 33.27%, making it a high-risk stock.
As much as I’m convinced this overly beaten-down tech stock is the buy of a lifetime, I also wouldn’t make a move until our tools tell us it’s time to buy.
But I’d like to know what you think about beaten-down tech stocks, like Netflix, during a time like this. Email me your thoughts.