Breakout

Let the Charts Be Your Guide on Netflix: Bespoke’s Hickey

Jeff Macke
Breakout

"If you're buying Netflix (NFLX) on fundamentals, you should revisit," says Paul Hickey, co-founder of Bespoke Investment Group.

Relax, Netflix bulls. A little fundamental overvaluation doesn't mean you have to kick a stock out of your portfolio. Ask the Nasdaq, which officially welcomes the content streaming king into the Nasdaq 100 (^NDX) today. The move adds another somewhat artificial bid under NFLX shares, not that the company needs it after gaining 140% YTD.

For fans of the PowerShares QQQ Trust ETF (QQQ), the most popular way to trade the Nasdaq 100, the inclusion of Netflix can't come soon enough. NFLX shares have outpaced the index by 14x year to date. The best of the stocks already in the club is Micron Technology (MU) with a mere +89% for 2013.

The reason strict fundamentals don't matter to Netflix for the moment is that the company has a huge number of skeptics and a great story, as Hickey explains in the attached video. At the beginning of the year Bespoke ran a study of Apple (AAPL) consumers and found a surprisingly high number of iTunes' famously loyal customer base moving toward streaming content services. "People are moving towards having access to more content rather than owning a specific piece of content."

One reason for the exodus is price. By way of example, on iTunes "Breakfast at Tiffany's" can be rented for $3.99 or purchased for $17.99. On Netflix you can watch Audrey Hepburn in her prime anytime you want for $8 a month. Episodes of "Arrested Development" sell for $1.99 apiece on iTunes. Netflix famously has the entire series available for no incremental cost, including season 4, which can't be had at any price on iTunes.

iTunes has fresher content but its pricing seems more dated than "Moon River."

Of course, it costs Netflix a dump truck full of money to make a new season of "Arrested Development." Producing content that will attract new subscribers is a risky bet for the best studios, let alone a company that got its start renting DVDs by mail.

Whether or not Netflix can make original content a compelling part of its business is almost impossible to handicap. Netflix can't be valued on the basis of discounted cash flows. It's a story stock, for better or worse.

That's why Hickey is taking his cues on how to play Netflix from the charts. As long as Netflix doesn't break its uptrend or drop below its 50-day moving average, Hickey says the chart will be a bullish formation.

For those playing at home, NFLX 200-day MA is currently sitting at around $204 a share, which is right about where the uptrend comes into play. Using those points as your absolute stops is a way for investors to get long a hot "story stock" without risking it all.

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