Netflix’s Inventory Nears A Breaking Level Following Weak Outcomes

The Netflix logo appears on a phone screen in this illustrative photo taken in Poland … [+] October 18, 2020. (Photo illustration by Jakub Porzycki / NurPhoto via Getty Images)

NurPhoto via Getty Images

Netflix Inc. (NFLX) fell about 5% on the evening of October 20th on its quarterly results. The company reported sales that were better than expected but disappointed with both profits and net additions from subscribers. The forecast for net additions in the fourth quarter was also disappointing.

The stock tested a critical level of technical assistance in over-the-counter trading. This can result in another drop of up to 18% on top of the drop the stock sees after earnings.

Netflix trading after business hours

Netflix trading after business hours

Trade view

At a breaking point

The stock was trading at $ 495 after hours, which is a crucial level of technical support. Should that level of support weaken, the stock is likely to fall to around $ 465. Compared to the closing price of around USD 525 on October 20, a decrease of around 11% is recorded.

Netflix technical chart

Netflix technical chart

Trade view

The more important problem is when the stock breaks below the $ 465 support. In this case, a double-top reversal pattern would be confirmed in Netflix. This would likely trigger a drop to around $ 405. This is a level of support that dates back to summer 2018. In addition, the relative strength index shows a significant shift in the momentum trend, indicating that lower prices are ahead.

Disappointing results

In addition to its weak technical setup, as mentioned earlier, the stock doesn’t come cheap. Currently, the stock is trading for about 8 times annual forward sell estimates. This is almost the highest rating since July 2018.

Netflix value for money

Netflix value for money


The problem is, the company may have seen massive subscriber and revenue growth due to the pandemic. The company reported net additions of 2.2 million subscribers, well below consensus analysts’ estimates of around 3.4 million. Additionally, the company posted net growth of 6 million in the fourth quarter, which was below forecast for 6.5 million.

In addition, the company had sales of $ 6.4 billion, which was about 1% above estimates. Earnings per share were $ 1.74, more than 18% below analyst estimates. Revenue forecast for the fourth quarter was $ 6.57 billion, which is an estimate of $ 6.59 billion. Ultimately, earnings were better than estimated at $ 1.35 per share versus $ 0.95.

Multiple contraction

If the pandemic has driven strong growth, it is reasonable to assume that subscriber growth will be slower in the future and therefore revenue growth may slow down. This could mean that the sales multiple for the stock needs to be recalculated. This could indicate that equity is about to contract multiple times, and thus a lower share price. For example, analysts predict that revenue growth will slow from 23.7% in 2020 to 17.7% in 2021 and from 16.7% in 2022.

There is no doubt that Netflix has been a fantastic growth story over the past few years. But the company might be nearing maturity now. When this happens and growth rates slow down, the natural evolution is for the multiple contract and stock price to be recalibrated.

Michael Kramer is a financial market strategist and portfolio manager of the Mott Capital Thematic Growth Portfolio.

Mott Capital Management, LLC is a registered investment advisor. The information presented is for educational purposes only and is not intended to be an offer or a solicitation to sell or buy any particular security, investment, or investment strategy. Investments involve risks and are not guaranteed unless otherwise stated. First, consult a qualified financial and / or tax advisor before implementing any of the strategies described here. Upon request, the advisor will provide a list of all recommendations made in the last twelve months. Past performance is not an indication of future results.

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