Netflix (NASDAQ:NFLX) may have taken a hit from being left out of Apple's (NASDAQ:AAPL) new video service, falling 2.3% yesterday, but we're not convinced this can change the fundamental picture. While the new competition may impact the long-term outlook, we are bullish in the medium term. International growth is rising and cord-cutting is in an uptrend. In addition, it's unlikely that, even in a recession, consumers will cancel their $10-a-month Netflix subscription.
The market is pricing in 8 percent long-term sales growth. Credit Suisse wrote in a note to investors “the market is embedding that NFLX will achieve 335 million subscribers by 2028," which will more than double the current number of a little more than 148 million subscribers. The market's also implying that Netflix will capture 42 percent of all global broadband households, excluding China, the firm calculates.
The shares have soared more than 6,000 percent in the last 10 years, rising 33 percent this year alone.
Netflix's current dominance of the internet entertainment market has allowed it to dramatically hike prices to offset plateauing domestic subscription growth. But this advantage may not last. Apple aims to start its video service in April, which could see Netflix forced to review its prices. At the same time, the cost of content is being driven up by competition. HBO’s "Game of Thrones" cost $10 million per episode. Netflix paid 30% more per episode for "The Crown."
The streaming mammoth's meteoric performance so far is reflected clearly in the technicals. The price bounced off the 100-week MA, providing strong support for the stock four times since 2013, with the last one propelling the price up 45%, breaking above its downtrend line since June 2018 and reaching the highest level since Oct. 15. That painted the most bullish picture among the FANG stocks.
After crossing above its downtrend line June, it has been trending in an ascending triangle, where eager buyers continuously raise their bids while sellers' offers remain stable.
Also, the triple main MAs are turning around from a bearish pattern, in which each shorter MA is lower than each longer one, with the 50 DMA less than 3 percent below the 100 DMA and approaching it from below. Also, the ascending triangle pattern is forming after prices successfully scaled above the famous 3.
Finally, and perhaps the most telling aspect of the ascending triangle, is that it’s taking place right on top of the downtrend since June, demonstrating the bull-bear struggle on the trend from here on out.
Trading Strategies – Long Position Setup
Conservative traders should wait for the short-term uptrend since the post-Christmas rally to post a decisive breakout, with at least a 3-percent penetration to reduce the probability of a bull trap, followed by a return move to retest the support of the triangle, or at least the broken downtrend line since June, with at least one long, green candle following a red or small candle of either color.
Moderate traders might buy the stock after a 2-percent upside breakout, followed by a pullback for a better entry but not necessarily for proof of the pattern’s support.
Aggressive traders may risk a long entry with a 1-percent penetration.
Trade Sample
- Entry: $362
- Stop-Loss: $355
- Risk: $7
- Target: $385, Oct. peak-resistance
- Reward: $23
- Risk-Reward Ratio: 1:4