Wrong Time to Buy Netflix

Netflix Inc. (NFLX) failed to reward shareholders for more than a year but is trading at an all-time high on Wednesday after JP Morgan and Atlantic Equities raised their price targets above $700. The streaming giant has been on fire lately, gaining more than 60 points in less than two weeks. Unfortunately, this vertical impulse has now landed on hidden resistance that favors a steep pullback and buying opportunity at much lower levels.

Q3 Subs Below Management Guidance

Growing optimism about the second half content slate and favorable year-to-year comparisons following 2020’s first half lockdown have underpinned these bullish calls. However, third quarter results through August project quarterly subscriber gains of just 2.7 million, well below management’s 3.5 million guidance, indicating that analyst projections require a September sign-up surge, dependent on new content that includes Money Heist, Lucifer, and The Circle.

JP Morgan analyst Doug Anmuth raised the firm’s target from $625 to $705, noting “We continue to like NFLX shares toward year-end based on strength of the 2H content slate, greater distance from pandemic pull-forward, stronger seasonality, & the significant global secular streaming opportunity w/NFLX only 20-25% penetrated among global pay TV households ex-China & at just 7% of US TV time”.

Wall Street and Technical Outlook

Wall Street consensus hasn’t changed in the last three months despite recent commentary, yielding an ‘Overweight’ rating based upon 29 ‘Buy’, 5 ‘Overweight’, 6 ‘Hold’, and 1 ‘Underweight’ recommendation. In addition, three analysts recommend that shareholders close positions and move to the sidelines. Price targets now range from a low of $342 to a Street-high $971 while the stock opened Wednesday’s session less than $20 below the median $625 target. Given the two-week surge, this placement suggests greater downside risk than upside potential.

Netflix sold off through 300 in March 2020 and turned sharply higher, nearly doubling in price into the September high at 555.88. Progressive highs and lows since that time have carved a shallow rising channel, with resistance struck for the third time in 14 months on Wednesday morning. This barrier is likely to stall the upward advance and trigger a proportional retracement that could offer a low risk buying opportunity in the 540 to 560 range.

For a look at all this week’s economic events, check out our economic calendar.

Disclosure: the author held no positions in aforementioned securities at the time of publication.