Netflix Could Fail Second Quarter Breakout

Netflix Inc. (NFLX) sold off nearly 7% on Oct. 21 after missing Q3 subscriber estimates and offering mixed Q4 guidance. It lifted back into the sell gap and dropped like a rock on Monday after Pfizer’s (PFE) blockbuster vaccine announcement triggered a broad-based exodus from COVID-19’s biggest beneficiaries. The decline has now arrived at range support for the fifth time, raising odds the stock will break down and fail the second quarter breakout.

High Churn Levels

Churn levels surged after the August release of the provocative “Cuties” film, which many believe sexualizes young girls. The controversy may have undermined Netflix quarterly performance, with many folks cancelling the service in protest. More importantly, huge subscriber gains in the first and second quarters as a result of pandemic shutdowns may have sapped future demand, especially in older demographics reluctant to abandon traditional broadcasting.

Jefferies analyst Alex Giaimo raised their target to $585 after the October report, noting “while the stock will likely get hit on the net add miss, we see many fundamental positives from the 3Q print (rich pipeline, inflecting FCF story, potential price hikes). History says to accumulate shares on earnings dips and own the stock longer-term, and we recommend sticking to that strategy. While bears will push back on slowing trends, we see many levers the company can pull to maintain healthy double digit revenue growth over time.”

Wall Street And Technical Outlook

Wall Street consensus is mildly bullish after the mixed quarter, with a ‘Moderate Buy’ rating based upon 21 ‘Buy’ and 5 ‘Hold’ recommendations. Three analysts now recommend that shareholders close positions and move to the sidelines. Price targets currently range from a low of $235 to a Street-high $700 while the stock opened Wednesday’s session nearly $100 below the median $580 target. This placement suggests analysts have over-estimated the long-term outlook.

Netflix broke out above the 2018 high near 420 in June and took off in a strong trend advance that posted an all-time high at 575 in July. Price action since that time has carved a near-perfect rectangle pattern, with resistance at that level and support in the 460s. The stock bounced off support for the fifth time this week but accumulation, as measured by the on-balance volume (OBV) indicator, continues to deteriorate and is now at a 4-month low. This bearish divergence raises odds for a failed breakout into the 400 level.

For a look at all of today’s economic events, check out our economic calendar.