Shares of Netflix (NASDAQ:NFLX) have sold off sharply following an earnings report that fell well short on subscriber growth. Netflix stock is down nearly 15% over the past three sessions and has given back most of the gains on the year. Certainly the paid streaming subscriptions were a major disappointment, but the actual earnings number beat expectations. The selling is getting overdone in NFLX stock. Time to be a buyer on further weakness.
Netflix reported earnings last Wednesday with EPS of 60 cents compared to expectations of 55 cents. Revenues were right in line at $4.92 billion versus estimates of $4.93 billion. This marks the fourth straight quarter of solid earnings beats from Netflix. Yet in that time frame, NFLX has actually dropped in price. The combination of earnings beats and lower stock price means NFLX stock has become comparatively more attractive on a valuation basis.
Subscriber growth was weak, with only 2.7 million new additions. That’s way below the 5 million anticipated. So while earnings were solid, the subscriber growth torpedoed Netflix stock. The company did reiterate, however, that it will add 7 million new subscribers in the third quarter. This is well above the previous guidance of 6.3 million additions and also an increase to the year-ago level of just over 6 million. So while growth has slowed, Netflix is definitely still growing.
NFLX Stock by the Numbers
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Momentum stocks such as Netflix trade more on technicals than fundamentals — and the technicals point to a pop in NFLX stock. Shares are now by far the most oversold they have been in the past year.
The 14-day RSI is now at the lowest readings in the previous 12 months and well below the 25 level. MACD is also at an extreme while Bollinger Band Percent B is now negative.
Previous times that Netflix stock reached such pessimistic levels on those three metrics proved to be great short term buying opportunities in Netflix. A break back above the $320 resistance area could lead to NFLX stock filling in the post earnings gap around $340. The Warren Buffett adage to be greedy when others are fearful certainly applies here after the recent drubbing.
Investors who missed out on adding NFLX stock to their portfolio should use the weakness to buy near current levels. Option traders may elect to sell out-of-the-money put spreads to position to be a buyer on a further leg down. Selling the Sep $280/$275 bull put spread should bring in 80 cents of premium with a 19% return on risk. The short $280 strike price provides nearly a 10% downside cushion to the $310.62 closing price of Netflix stock.
Tim Biggam may hold some of the aforementioned securities in one or more of his newsletters. Anyone interested in finding out more about Tim and his strategies can go to https://marketfy.com/item/options-and-volatility.
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