Netflix - Buy, Sell, or Hold?

Ed Ponsi

Today's guest author is Ryan Watkins, of TraderTactics.com

Netflix has had an incredible run, gaining over 50% since the start of the year. The stock just climbed above $500 for the first time. 

Should investors jump in, hang on, or head for the exit?

Netflix (NFLX) is subscription-based, and those subscriptions are growing rapidly. Sales rose 28% in the March quarter, and 31% for quarter ending in December 2019. With such strong growth, it's no wonder the stock price has risen to new heights.

Will Netflix continue to soar? Let’s view this stock through the lens of the two major forms of analysis: Fundamental and Technical.

Fundamental - let's look at four factors:

Earnings: In the most recent quarter (March 2020), earnings were up by 107%. In the previous quarter (December 2019), Netflix saw a 333% earnings increase. With the COVID-19 situation still unresolved and more possible lockdowns ahead, Netflix is likely to continue its rapid growth. 

Sales: Netflix has experienced 30 quarters of sequential sales growth. We expect this to continue through the end of 2020 and beyond, as new viewing habits take shape. 

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Valuation: Netflix is a growth and momentum play, so its valuation metrics are stretched. The stock's 12-month trailing PE ratio is 101. On the positive side, a high PE ratio is a common feature among many momentum stocks. 

Return on Equity: Netflix currently boasts a return on equity of about 32, ranking it above 96% of the companies in the media sector. 

Although new competition from Apple and Disney is a concern, Netflix is expected to remain a leader in the U.S. digital video content space.

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Technical

On the weekly, daily, and 4-hour charts (shown below), as well as a variety of other time frames, Netflix is in a persistent bullish trend. 

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Long term support is located at $393 (left chart). Buyers remain in control as long as the price is maintained above this level. 

Intermediate support can be found in a range between $432 and $455 (center and right). 

A pullback to this price area would create an ideal entry point for new longs. We would consider buying common stock or calls, or selling a credit spread if the price reaches this area. Our stop would be under $393.

Please be aware that Netflix is scheduled to report earnings on July 16th. 

Author: Ryan Watkins, President and Founder of Trader Tactics

You can reach the Trader Tactics team at www.TraderTactics.com