By: Melvin Pasternak of Street Authority
While old media stocks like Viacom (Nasdaq: VIAB), Walt Disney (NYSE: DIS) and 21st Century Fox (Nasdaq: FOXA) were hit with bad news and huge losses last week, Netflix (Nasdaq: NFLX) scored three straight record closing highs before succumbing to profit-taking on Friday.
Shares have been on a tear, more than doubling in the past four months. I'm sure plenty of investors are kicking themselves for missing the boat, but it's not too late. When a stock makes a new all-time high, especially a high-momentum growth stock like NFLX, it tends to keep moving higher. And Friday's sell-off provides an attractive short-term entry level.
Netflix is being driven by strong growth domestically and abroad. On July 15, the video streaming giant reported better-than-expected second-quarter earnings of $0.06 per share on revenues of $1.64 billion.
At the end of the quarter, its subscriber count stood at 65.6 million globally, 31% higher than the same quarter last year. Both domestic and international subscriber gains were well ahead of estimates, and the company introduced its services in Australia and New Zealand.
Now it has its sights set on Japan and Europe. The Japanese launch is set for Sept. 2. And in Europe, the plan is to offer video streaming service in Spain, Italy and Portugal in October, bringing the count to 12 European countries.
Management's goal is to make the service available worldwide by the end of 2016; however, they are not solely relying on expansion to solidify their position. To stay competitive, Netflix is aggressively investing in original content, launching a number of high-profile and critically acclaimed series.
The cost of producing its own shows, along with negative currency exchange, is expected to weigh on earnings this year. While 2015 revenue is projected to increase 24% to $6.83 billion, the per-share profit is forecast to fall more than 50% from 2014 to $0.23 per share. However, analysts expect a 30% increase in earnings in 2016 to $0.30 per share on a 26% jump in sales to $8.63 billion.
From a technical perspective, the stock looks like a strong buy.
As the five-year chart shows, Netflix is nothing if not volatile.
In mid-2011, shares peaked near $44 (split adjusted) after a long run up. Less than six months later, the stock had plummeted to a fraction of its former value. Upon reporting it had lost over 800,000 subscribers, NFLX hit a low around $9 in November 2011.
After roughly doubling from there, shares again fell, putting in a bottom in the mid-$7 range in mid-2012. Then a furious rally ensued. By fall 2013, shares had taken out their previous high with barely a pause. They continued their ascent to a high around $65 in early 2014.
At that juncture, shares declined rapidly but held support above previous resistance, refusing to drop below historical support around $44. A rally then took shares to a nominal new high just below $70 in the summer of 2014.
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Again, shares faltered, but once again held above $44 support. As part of this decline, the stock broke its major uptrend line, which had been in force since the 2012 low.
At the beginning of this year, NFLX took off. It is from this point that I draw the current intermediate uptrend line.
In April, shares broke above $70 resistance. An accelerated uptrend line, which can be drawn from this breakout level, now intersects the chart near $105. I plan to use this to set my stop-loss, which I will place just below it at $102.79.
I'm setting my price target at $149.85, just below round-number resistance at $150. With 20%-plus potential upside in shares, there is still time to buy. But I wouldn't wait too long. Given Netflix's trading history, it likely won't be long before shares soar to new heights.
Recommended Trade Setup:
-- Buy NFLX at the market price
-- Set stop-loss at $102.79
-- Set price target at $149.85 for a 21% gain by early 2016
Note: While NFLX appears undervalued here, the relatively high share price may still put it out of reach for some investors. But there is a way to take a bullish position in the stock for a fraction of the amount it would cost to purchase shares.
In fact, risking as little as $2,900, you could control 100 shares of the stock, which would cost you more than $12,300 to buy outright. And if NFLX hits the target, you would make a 55% return on your investment.
This is what we at Profitable Trading call "The Levy Technique" after a former child prodigy who used it to make $600,000 by the time he was 18. If you're interested in learning exactly how it's done, follow this link.