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Subscriber Exodus Could Trigger Netflix Breakdown

By:
Alan Farley
Updated: Oct 3, 2020, 13:39 UTC

Cancellations at the streaming service surged after the release of a French film that may sexualize young girls.

Netflix

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Netflix Inc. (NFLX) is under pressure in Tuesday’s U.S. session after reports the streaming service has lost a substantial number of subscribers due to controversy arising from the August release of the French movie ‘Cuties”, which many viewers believe sexualizes young girls.  The exodus has forced some analysts to lower Q3 2020 estimates from previously impressive growth underpinned by pandemic isolation.

Netflix September Subscriber Losses

Netflix’s typical monthly churn is “impressively low” at 3.5% to 4% but that number may have risen above 5% in September as a result of cancelled subscriptions. In turn, this would translate into a quarterly loss of 28 million subscribers, or an increase of 8 million quarter-over-quarter. Unfortunately, the company has been quiet as a church mouse about the movie’s impact so investors may have to wait until Oct. 20 earnings to measure the exact impact.

Wells Fargo analyst Steven Cahall discussed the exodus in a morning note, commenting, “If we are to believe reports then NFLX faced a short-lived but potentially stark churn uptick in September due to controversy around Cuties. We think this could weigh more heavily on Q3 net adds than investors realize so we reduce our estimate for global streaming net adds from +5mm to +2.5mm (NFLX’s guidance). Given how strong Netflix is as a service we’re loathe to get too negative, but our churn analysis does imply some meaningful pressure.”

Wall Street And Technical Outlook

Wall Street consensus has been stuck in the middle for months, highlighting persistent conflict about potential upside, with a ‘Moderate Buy’ rating based upon 21 ‘Buy’ and 9 ‘Hold’ recommendations. However, five of the 35 analysts covering the stock now recommend that shareholders take profits and move to the sidelines. Price targets range from a low of $220 to a street-high $625 while Netflix is now trading more than $36 below the median $524 target.

Unfortunately for bulls, the Netflix chart is flashing warning signs as we head into the fourth quarter. The stock topped out at 568 in July and pulled back into the 460s, establishing the edges of a rectangle pattern that’s still in force, nearly 3-months later. The stock sold off to range support for the second time earlier this month and still hasn’t bounced, waving a red flag at the same time that accumulation readings have fallen to 4-month lows. This is a near ideal set-up for a breakdown that reaches the 200-day moving average near 430.

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About the Author

Alan Farley is the best-selling author of ‘The Master Swing Trader’ and market professional since the 1990s, with expertise in balance sheets, technical analysis, price action (tape reading), and broker performance.

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