Netflix relief rally sees a twist

Summary

Netflix shares rose modestly on Wednesday after surging the night before.

Netflix leads from a closer front

Netflix’s well received quarterly results are helping its shares recoup more of their 25% fall from record peaks in June. With a 4% rise as I write, the stock hasn’t matched Tuesday’s ‘after-hours’ surge as high as 14% after the figures showed, amongst other strengths, rebounding subscriber growth. But its shares are still leading fellow consumer web giants on Wednesday even as a sharp Wall Street rebound in the previous session loses momentum. The stock is the heaviest-weight riser in a lacklustre S&P 500 index. It’s also sharply outpacing a negative Dow Jones U.S. Technology Sector Index. Investors clearly still like the streaming video leader’s Q3 performance, including an estimate-busting 5.9 million subscriber additions outside of the United States, the category which triggered the chief upset for Netflix stock this year after a Q2 let down. But the jury’s still out on whether the first set of FAANG quarterly numbers will help stabilize markets as widely hoped after fuelling Wall Street advances in recent years.

Netflix faces mouse that roars

The tougher investment backdrop implies a higher threshold for Netflix’s stock too. Huge production expenditure means it is still years away from turning a profit. Yet at 130 times this year’s earnings, even after recent weakness, the stock is easily the priciest among rivals, including Amazon, and now Disney. The home of the mouse has recently been pulling blockbuster offerings like the Star Wars series from streaming rivals as it ramps up its own efforts to woo cord cutters. Plus, Disney’s intended Fox purchase will add scale, making conditions even tougher for cash-burning competitors. If recent stock market turbulence also heralds tougher times for growth shares like Netflix (see 600% 5-year net return) in favour of established and/or more diversified dividend payers, recent enhanced volatility in Netflix shares could be rewound more frequently from now on.

Thoughts on Netflix share price chart

From a technical perspective, the main theme for the stock after its comeuppance over the summer remains the range spanning from just under $390 to about $311. The range represents the failure high from earlier this month and the bottom of the corrective move that was notched in August. Clearly, the stock will remain subject to ambivalent sentiment so long as the structure holds. True, NFLX has this week corroborated that its underlying trend remains a rising one. Note the upswing after testing the underside of its rising 200-day moving average (the blue line in the chart below). But Wednesday’s indecisively large range alone suggests another attempted break higher will face similar challenges as the last.