Netflix, Inc.: Is It Time to Ditch Netflix Stock?
Time to Panic on NFLX Stock?
Netflix, Inc. (NASDAQ:NFLX) missed earnings expectations on Monday, July 19, 2016. As a result, NFLX stock is currently trading at $84.89 per share, down 14% on the day of its earnings report. Based on investors’ reaction to the news, it is fair to say the numbers were disappointing.
Investor concerns are focused on the lower-than-expected subscriber numbers for second quarter. The net number of new subscribers for Q2 was 1.68 million. Netflix had projected an addition of 2.5 million second-quarter subscribers. This is a considerable miss. Adding to the disappointment, Netflix guided down its Q3 subscriber numbers.
Netflix blamed the shortfall on increased prices of its service. Long-time Netflix subscribers previously enjoyed prices as low as $7.99 per month. Currently, Netflix is in the process of phasing out those lower prices. New and existing costumers will soon be paying $9.99 for the standard high-definition package. This price hike caused an increase in the number of service cancellations, which attributed to the missed subscriber numbers.
This marks the second straight quarter that Netflix has disappointed. Year-to-date returns sit at a loss of 25%, standing in stark contrast to 2015’s numbers, which saw a 134% return for NFLX stock investors.
Was the Drop Foreseeable?
Perhaps investors could have used NFLX stock’s price chart as a possible looking glass to provide some guidance on the possible direction of the earnings reactions. After all, a stock’s share price is deemed to reflect all relevant information.
Chart courtesy of www.StockCharts.com
In mid-February 2016, NFLX stock produced a death cross on the chart. A death cross is a bearish signal that occurs when the faster 50-day moving average crosses below the slower 200-day moving average. Traders use this signal to confirm a bear market on the horizon. Shares of NFLX stock have been confined to the 200-day moving average. The stock’s price has tested the moving average in mid-April and again in late March, but failed to trade above the 200-day moving average.
Over the time horizon, NFLX stock has put in a defined downtrend highlighted by the green line from December 2016. A downtrend is defined as a trend of lower lows and lower highs. This phenomenon is explained as investors are willing to sell at lower prices following each bounce. Bearish spacing also exists, as the faster moving average isn’t converging with the slower moving average. The slopes of the moving averages are approaching a negative, which will further confirm the trend. The bias based on the chart going into earnings was clearly bearish.
This is not the first time Netflix has disappointed on an earnings report following the aforementioned death cross. First-quarter earnings produced a similar drop and shares of NFLX stock closed down 13% on that fateful day, similar to the current drop of 14%.
Using the chart as a precursor for a possible bias for an earnings reaction would have proved correct in this case.
The Bottom Line on NFLX Stock
NFLX stock is underperforming the NASDAQ benchmark index. Shares are gripped by bearish forces and the trend is to the downside. NFLX shares would first need to break above the downtrend line and begin making higher highs for the trend to change. In the present junction, more downside price movement is a strong possibility. It would be wise for investors to step aside and wait until the chart signals better times ahead.