NEW YORK (TheStreet) --Netflix (NFLX - Get Report) has been a stellar performer the past four years, starting as a young teenager (split adjusted) in 2012 and stopping short of $130 this year, but a two month head-and-shoulders top pattern is going to at least pause the advance.
A head-and-shoulders top pattern basically is three attempts to move higher on the chart with the second or middle attempt pushing to a new high. With NFLX, we have a left shoulder in July around $120. We have a pullback and push to a new high shy of $130 (the head) followed by another pullback. One more rally to $120 forms the right shoulder. Notice how the On-Balance-Volume line (OBV) has a peak in June but a much lower peak in early August as the "head" is formed. This tells us that holders of NFLX sold early in the pattern, reducing their positions. Depending on how you draw the neckline to this pattern, the downside price target is in the $70 to $65 area.
The target or price objective is derived by subtracting the height of the pattern (the distance from the neckline to the top of the head) from the neckline.
Separately, TheStreet Ratings team rates NETFLIX INC as a Hold with a ratings score of C+. TheStreet Ratings Team has this to say about their recommendation:
"We rate NETFLIX INC (NFLX) a HOLD. The primary factors that have impacted our rating are mixed – some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. The company's strengths can be seen in multiple areas, such as its robust revenue growth, expanding profit margins and solid stock price performance. However, as a counter to these strengths, we also find weaknesses including deteriorating net income, generally higher debt management risk and disappointing return on equity."
Highlights from the analysis by TheStreet Ratings Team goes as follows:
- NFLX's revenue growth trails the industry average of 33.7%. Since the same quarter one year prior, revenues rose by 22.7%. This growth in revenue does not appear to have trickled down to the company's bottom line, displayed by a decline in earnings per share.
- The gross profit margin for NETFLIX INC is currently very high, coming in at 84.02%. It has increased from the same quarter the previous year. Regardless of the strong results of the gross profit margin, the net profit margin of 1.60% trails the industry average.
- The company's current return on equity has slightly decreased from the same quarter one year prior. This implies a minor weakness in the organization. When compared to other companies in the Internet & Catalog Retail industry and the overall market, NETFLIX INC's return on equity is below that of both the industry average and the S&P 500.
- You can view the full analysis from the report here: NFLX Ratings Report