Netflix, Inc. (NFLX) stock is trading more than 3% higher in Wednesday’s pre-market session after the company beat first quarter earnings per share (EPS) expectations by $0.06 and met revenue estimates at $4.52 billion. Revenue rose a healthy 22% year over year, signaling continued rapid growth, but the streaming giant lowered second quarter profit estimates from $1.00 to just $0.55 despite a recent subscription hike.
The company added a record 9.6 million subscribers in the first quarter, up 16% year over year, with 1.6 million in the U.S. and 7.3 million internationally. Netflix also stated that upcoming competition from Apple Inc. (AAPL) and The Walt Disney Company (DIS) is not expected to affect 2019 growth because “the transition from linear to on demand entertainment is so massive and because of the differing nature of our content offerings.”
The paid subscription base rose to an astounding 149 million subscribers, highlighting torrid growth in recent years, while market capitalization now stands close to $160 billion. Those incredible metrics could expand further in the coming quarters unless new rivals form broader partnerships, expand coverage and are willing to spend a larger chunk of revenue on original production. That will be especially hard for Disney, which is already giving away hundreds of hours of content through the ABC and Disney networks.
However, Netflix stock is already priced for perfection, with a 134.13 trailing price-to-earnings (P/E) ratio and 56.52 forward P/E. Those lofty numbers could explain why the stock initially sold off about four points after the news on Tuesday evening and didn’t bounce until Wednesday’s pre-market session. That uptick has now mounted a four-week trendline around $365, setting the stage for a trip to $380 in the coming sessions.
NFLX Long-Term Chart (2009 – 2019)
The stock cleared nine-year resistance at a split-adjusted $5.68 in 2009, entering a powerful uptrend that stalled in the mid-$40s in 2011. It sold off into the single digits one year later, generating a historic buying opportunity, ahead of a powerful uptick that reached new highs in 2014. It rallied into the $120s in 2015 and settled into a trading range, ahead of another breakout following the presidential election.
The stock more than tripled in price after that breakout, posting an all-time high at $423.21 in June 2018. It then eased into the deepest correction since 2011, losing nearly 200 points in a 45% six-month slide. A first quarter recovery wave recouped lost points at a rapid pace, lifting above the .618 Fibonacci sell-off retracement level in February. Price action since that time has been consolidating above that level and below resistance at the .786 retracement just above $380.
The monthly stochastics oscillator crossed into a buy cycle in January 2019 after dropping to the same level that generated 2014 and 2016 reversals (red line). The stock hit new highs within a year of those crossings, suggesting that Netflix will also trade at new highs at some point in 2019. The buy cycle remains in full force in April, after expanding into the overbought zone and triggering a “stochastics pop” buy signal, popularized by Jake Bernstein in the 1980s.
NFLX Short-Term Chart (2016 – 2018)
The first quarter uptick reversed just below the unfilled July 16 gap between $385 and $400 in March, reinforcing resistance in the $380s. Bears will be defending that level at all costs, with a downturn likely to end the upside for now while a breakout would initiate a test at the 2018 bull market and all-time high. The on-balance volume (OBV) accumulation-distribution indicator may offer an early buying signal for that breakout when it lifts above the January high (upper red line).
The Bottom Line
Netflix was trading near $370 in Wednesday’s pre-market and could quickly rally into major resistance in the $380s.
Disclosure: The author held no positions in the aforementioned securities at the time of publication.