Weekly Investment Idea
Netflix Inc., NFLX
Netflix started in 1997 as a DVD-rental-by-mail firm and spent the first five years struggling to get to a sustainable model that was cash flow positive. It is now a global streaming entertainment service offering movies and TV series commercial-free, with unlimited viewing on any internet-connected screen for an affordable, no-commitment monthly fee. It is available everywhere apart from China.
Q1 earnings disappointed investors and the immediate aftermath of earnings release was a 10% correction in the share price.
Year-on-Year growth for Q1’21 was 24% and revenue from the start of the pandemic to date had been growing Quarter-on-Quarter. Q1’21 operating income was $1,960,000 with an operating margin of 27.4% which was a really good set of figures for the company. However, their forward guidance for the coming quarter was for this operating income to slow down.
Today we see the US indices and especially the Nasdaq, in which the NFLX resides, showing negativity pre-US opening bell. This follows a few days of declines since Fed Chair Powell testified to congress. At the end of last week, the Volatility Index was rising on higher inflation expectations, falling bond yields, weakening consumer sentiment, and rising concerns due to the Delta Variant. As we are in earnings season, it may take some serious investment and stella earnings to turn this tech ship from crashing a lot further.
For Netflix, the company share price got a bit of a boost a month ago when news came out that they had partnered with Steven Spielberg’s production company Amblin Partners. The multi-year deal is to supply multiple movies per year to Netflix Inc. The other boost to the NFLX share price came from investors’ dissipating fears of run-away inflation, which big tech companies like Facebook, Twitter and Nvidia Corp all benefitted from, pushing the Nasdaq to 15,000 and new all-time highs.
Year to date performance is -1.93% but momentum and price action are both bullish on a weekly time frame. The current chart pattern is conceivably a bull flag and while the share price is above the weekly period 50 exponential moving average, there is a chance to buy the dip and ride the price higher as the Nasdaq possibly heads towards 16,000.
The bears however will be waiting on every word in the coming Q2 2021 earnings to see how well the company is doing at increasing Global Streaming Paid Memberships. The Netflix forward guidance from the Q1 2021 earnings call had expectations of an 8.1% growth in memberships. If this figure is below 13.6% that would mark the 5th quarter in membership percentages declining, showing a slowing growth trend. This could be expected as the pandemic would have gone some way to bringing forward anyone who was on the fence about whether to take out a subscription, as we all sat at home wondering whether we would forever be on universal basic income or if we would return to normality. Now the vaccination programmes are allowing people to go back to work, they may not have time or the inclination to sit around binge watching films etc., so the need for a Netflix subscription is bound to dwindle from the pandemic highs. However, investors want to see that the golden goose is still going to providing the golden eggs for time to come.
“We are a movie and TV series entertainment network.”
Netflix is reportedly striving to expand its content outside of its core television and film programming. The company has announced that it hired Mike Verdu, former Electronic Arts (EA) and Facebook-owned (FB) Oculus executive, as vice president of game development.
According to a report from Bloomberg, Netflix is aiming to offer video games to users in the next year. Investors are poised to eye Netflix’s earnings report this week for more details about the strategy for the new business offering.
For technical buyers, the pivot support prices could be a great place to look for a buying opportunity. S3 = 407.51, S2 = 461.50 and S1 = 494.86.
A fall in price towards the daily 200 ema would coincide with the bottom of the weekly trading range and be around the S1 pivot. Making 490-500 a good level for patient longs to wait for, to either add into current trades or instigate a new one.
If the Nasdaq itself is to correct 10% from its highs that would bring the tech index down to 13,500 again which would be in the middle of that previous balance area formed between February and May 2021. Again, probably another great place to consider taking longs in stocks like Netflix.
The NFLX earnings reports is due to be released tomorrow (20th July 2021) at 9pm BST. The expected quarterly Earnings Per Share is 3.15, Expected Quarterly Revenue is $7.32bln but as we saw in the Q1 earnings reports, investors may not read too much into the headline figures of earnings, but more into the overall growth of the company. With the probable move into the gaming industry this could be enough of a diversification to bring more subscribers into the model. But that is for the future. Trade what you see and look for value.