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Netflix Tanked This Week – Should You Buy?

Netflix Tanked This Week – Should You Buy?

Netflix’s stock is being punished for a mediocre quarter. Here’s what you should know before buying the dip.

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Earlier this week, Netflix (NASDAQ: NFLX) stunned Wall Street by posting weaker than expected subscriber growth and revenue in Q2 sending the stock crashing 12% Tuesday.

The company had added only 5.15 million subscribers during the quarter, missing its own projections for subscriber growth during the quarter by 1 million. Revenue was also hurt by the stronger dollar, which damaged international revenues.

It’s outlook for the current quarter also reflects a deceleration as the company expects to add 5 million subscribers, a lower number than the same quarter last year.

But now the question is: is this just a blip, or sign of the beginning of a longer term problem?

In the last year, Netflix’s stock has doubled as investors bet on the company continuing to add tens of millions of subscribers around the world for the foreseeable future. And it may be true that Wall Street has focused more on the allure of the Netflix story rather than the fundamentals of the stock.

Netflix, for its part, said in a letter to shareholders that it had a “strong but not stellar” quarter, and acknowledged that it had “over-forecasted” both domestic and global net subscriber additions and that “acquisition growth was lower than we projected.”

“We’ve seen this movie of Q2 shortfall before, about two years ago in 2016, and we never did find the explanation to that, other than there is some bumpiness in the business, and continued to perform after that,” said CEO Reed Hastings during the company’s earnings presentation.

From a technical standpoint, the stock almost hit a key support level to highs reached in mid-April while also forming a bearish double top.

Source: TradersPro.

With the double top pattern, traders may want to wait until the price comes back down to hit the resistance level at around $336 before buying this dip. Considering how shallow the stock’s previous dips have been, just look at the similar pattern between March and April of this year, this one also seems likely to be as well.

Why? Because Netflix doesn’t miss twice. In the past nine quarters, the streaming giant has fallen short of its subscriber guidance twice before, and in both instances, it has rocked back the following quarters with big numbers.

Netflix always bounces back, and until we start seeing back-to-back bad quarterly performances, the company should still continue to climb.

GBH Insights analyst Daniel Ives sees this as a single quarter blip as well, saying, “I think it’s more of a one-quarter issue that shouldn’t bleed into the next few quarters, despite the company’s conservative guidance for September.”

JPMorgan analyst Doug Anmuth agrees, and said in a note to clients on Tuesday, “We recognize that Netflix shares could be under additional pressure. … However, we believe the pullback will prove to be a compelling buying opportunity.”

Q3 will see premieres from some of Netflix’s biggest properties, including Orange Is The New Black, BoJack Horseman, and the second season of Ozark, which is likely to boost subscriber sign-ups, and Q4 should be a massive quarter for the company with the premiere of the newest season of Stranger Things.

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