Netflix Stock Could Be Set for Major Breakout

Netflix Stock Could Be Set for Major Breakout

NFLX Stock Still Demanding High Premium

In 2020, with many people confined to their homes due to the COVID-19 pandemic, there was a surge in demand for goods and services such as food deliveries, exercise equipment, technological gadgets, and video streaming.

On November 17, 2020, shares of video streaming leader Netflix, Inc. (NASDAQ:NFLX) surged to $700.99. Since then, with the pandemic under wraps and workers back at the office, the demand for home entertainment has declined, which has led to a sell-off of Netflix stock.

NFLX stock plummeted to a 52-week low of $162.71 on June 12, 2022, down by 70% from its 52-week high of $544.27 (set on January 12, 2022) and down by 77% from its aforementioned record high in November 2020.

Since June 12, 2022, however, shares of Netflix Inc have rallied by 102% to $332.00. Given that rally, chasing Netflix stock at this point is risky, especially if market sentiment turns downward.

Advertisement

Stock traders have Netflix’s upcoming fourth-quarter and full-year 2022 results to look forward to. A disappointing report could lead to major selling of NFLX stock. Often, it is best to wait for a company’s financial results before considering its stock.

One thing to note is that Netflix Inc is now a profitable company that continues to grow its revenues. There are, however, signs of its revenue growth slowing due to competition from rivals such as Amazon.com, Inc. (NASDAQ:AMZN) and Walt Disney Co (NYSE:DIS). Netflix’s fourth-quarter report should give us a sense of how well the company has been dealing with that competition.

Netflix Inc earned an adjusted $11.24 per diluted share in 2021, but analysts estimate that this contracted to $10.37 per diluted share in 2022, and that the company will earn $10.50 per diluted share in 2023. (Source: “Netflix, Inc. (NFLX),” Yahoo! Finance, last accessed January 17, 2023.)

Netflix Inc is trading at a hefty 32 times the company’s consensus 2023 earnings-per-share (EPS) estimate and 4.3 times its consensus 2023 revenue estimate. This is not cheap, which makes Netflix stock vulnerable to selling, as it’s priced at a high premium.

Netflix Stock’s Major Long-Term Trendline Holding Up

Netflix Inc’s 20-year stock chart shows an impressive upward trendline that has been in place since early 2002. During that period, there have only been two instances of NFLX stock testing its trendline support: in 2008 (during the subprime mortgage sell-off) and in 2012. In both cases, Netflix stock bounced back.

Since 2012, shares of Netflix Inc have easily held at well above their trendline. 

Chart courtesy of StockCharts.com

NFLX stock’s 18-month chart below shows a nasty decline from its high.

This included the emergence of a death cross pattern in February 2022, when shares of Netflix Inc were trading just above $500.00. A death cross occurs when the 50-day moving average breaks below the 200-day moving average. It usually results in additional selling, as was the case with Netflix stock.

NFLX stock subsequently fell by another 68% after this “sell” signal, which also included a negative downside trade gap and a bearish falling knife pattern. This takes time to recover from, but Netflix stock has done so.

Chart courtesy of StockCharts.com

At this point, shares of Netflix Inc have recovered their downside trade gap after staging a bullish ascending triangle pattern and a golden cross pattern in November 2022.

Analyst Take

Shares of Netflix Inc will be volatile as the company reports its fourth-quarter and full-year 2022 financial results.

Strong fourth-quarter results could see NFLX stock climb toward $400.00, followed by a gap in the range of $452.00 to $489.00. Above this is a resistance level at $600.00 to $650.00. The downside risk is $300.00, $270.00, and $250.00.

Long-term traders who have their eyes set on Netflix stock might want to invest in tranches. They could consider NFLX stock on major price weakness, particularly if there are additional declines.