Why did the company become one of the best performing stocks during the coronavirus pandemic? Is it worth buying the stock at the current market levels?

Netflix Inc. is the world’s leader in the streaming entertainment business with its 183 million paid subscribers in more than 190 countries around the world, enjoying documentaries, TV series and feature films across a huge variety of genres and languages.

The company has got more than 20 years of experience in the sector it operates.

In the past 5 years especially Netflix has done an incredible job in increasing the quality of the content it provides to its paid subscribers and expanding in many new countries around the world, which has given the company a chance to further boost its subscription revenues and profits. In fact, Netflix’ s revenue has more than tripled since 2015 while the net profit has gone up tenfold. In other words, the company has done an incredible job in growing its customer base globally and that has been a key factor in its overall market and financial performance, which has in turn been boosting the share price and making more money for its shareholders.

Q1 2020 – Financial performance & why the company was among the biggest winners during the COVID-19 pandemic

Netflix has recently reported its financial performance for the first quarter of 2020. It is important to mention that this was one of the best quarters in the company’s history where the company added more than double its target for subscriber growth and beat by far Wall Street’s expectations for the period. The entertainment giant added 15.77 million new paid subscribers globally, which was the highest number of new subscribers the company has ever gained in a single quarter.

How did the company benefit from the COVID-19 pandemic?

There are a few companies out there that have actually benefited greatly from the current pandemic. Due to the imposed social distancing and quarantine around the world, people have been staying mostly at home. Thus, they have been having more time for watching TV series and movies and therefore that has led to a huge increase in the company’s new paid subscribers for the quarter.

Therefore, the company managed to add another 15.77 million new subscribers, growing its overall subscribers’ base towards the current 183 million globally.
In fact, it is important to mention that Wall Street’s expectations were for only 8.47 million new subscribers during the first quarter of the year.

The company’s revenue figure for the first quarter was $5.8 billion, beating analysts’ expectations. The earnings per share for the quarter came out at $1.57, slightly below analysts’ expectations for $1.64. Yet, the earnings figure showed an increase compared to the Q4 2019 report, where the company delivered $1.3 per share. The company’s financial rations are also solid with its current RoE (return on equity) of 30%, RoA (return on assets) of 7% & RoI (return on investment) of 6%.

In other words, the company has managed to continue boosting its profitability and deliver great financial results, rising even more promising expectations for the future.

Technical analysis & share price performance

Due to Netflix’s huge expansion globally and the great quality of new products and features it provides subscribers with, leading to its great financial performance in the past few quarters, the share price of the company has been very bullish since the 3rd quarter of 2019. The stock was trading at only $253 in the end of September 2019 when the company beat analysts’ expectations for the 3rd quarter of last year and delivered better than expected earnings for the quarter, which immediately led to a huge buying interest among investors who started pushing the stock higher. The price started heading higher and formed a very strong bullish trend that lasted until the beginning of March 2020 where the stock reached its peak for the year at $392. Yet, due to the coronavirus pandemic and the huge sell-off across the stock market all around the world, Netflix’s stock depreciated as well, reaching the lows at $291 two weeks later.

Yet, as we have mentioned earlier, the social distancing and the fact that people have been staying at home have given investors a signal that the correction back then was a great buying opportunity, giving them a chance to boost their profitability to the upside, considering the great financial performance of the stock and the even stronger expectations for the 1st quarter earnings report. Thus, investors started buying aggressively and that led to a massive bullish rally in the past 1.5 months, sending the price from $291 to $450. In fact, this was a new all-time high, since the previous record was reached back in 2018 when the stock reached its peak at $420.

Since the company reached its new record high on the stock on the 20th of April we have seen a bit of profit-taking interest, which has then sent the price down towards the key support at $394-$400 where investors started buying again and have already pushed it towards the current $415 level.

After analyzing all the above-mentioned factors and the huge financial success of the company, we believe in the longer-term success of the company and would like to add Netflix to our portfolio. Therefore, we need to decide at what price we would like to buy the stock in order to maximize our followers’ profitability to the upside. Moreover, we are taking into consideration that the situation with the coronavirus has started improving and countries are slowly getting out of the recent lockdown, which would also motivate investors to seek great buying opportunities on leading stocks, such as Netflix.

Going back to our previous point, the daily chart shows the key psychological support at $394-$400, which used to be a strong resistance level that was broken in the middle of April during the huge buying activity on the stock, where investors pushed it towards the new record of $450.

As soon as investors started cashing in some profits and the price reached the lows at $394-$400 there was a lack of further selling activity and that could easily be seen on the chart, which shows that as soon as the price reached the $400 support investors started buying again, taking advantage of the short-term profit-taking correction and sending the price towards the $415 already.

In fact, the middle Bollinger band line matches with the key support at $400, while the RSI is still heading higher at the current levels at 55. The Stochastics indicator has already crossed down in the overbought territory during the recent correction that has taken place and is now close to reaching the oversold area where it will be giving further bullish indications as well.

Furthermore, the Fibonacci retracement at 38.20% matches perfectly with the support at $400, giving a further buying indication at that key psychological support level.

Chart: Netflix Inc.


As you know, our correlation-confirmation model gives us a chance to identify great market movements and therefore be able to maximize our profitability on different stocks. Yet, before we buy the stock we need to get a confirmation from some of the biggest ETFs and make sure they confirm our bullish stance on the stock.

In order to determine whether Netflix is a good buying opportunity at the strong support mark at $395-$400, we would need to get a confirmation from the leading ETFs out there who have Netflix in their portfolio.


Therefore, we have decided to analyze the performance of the SPY (SPDR S&P 500 ETF Trust). Netflix is one of the biggest names and leading companies within the SPY and plays an important part within the ETF.

By looking at the daily chart, one could see the strong bullish rally that has been taking place on the SPY since the 20th of March. The price found its ground after the sell-off that had occurred before that caused by the coronavirus outbreak and the huge depreciation of the whole stock market back then. Yet, since the SPY represents the performance of the biggest companies within the S&P 500, it was logical to expect a lot of buying activity among investors at the great correction that had sent the price down from $340 to $220, giving a great buying opportunity at a huge discount.

Similarly to the chart of Netflix, the SPY has seen a very strong bullish rally from the key support at $220 towards the $294 highs (34%).

The technical indicators had logically gone to the overbought territory followed by the huge rally in the past 5 weeks since the 20th of March. Therefore, the price made a bit of a correction from $294 to the current $283 mark. Yet, the chart looks very similar to the one of Netflix and there is a strong support mark close to the current levels, standing at $274-$275. The 23.60% Fibonacci retracement level together with the middle Bollinger band and the 50-day moving average are all standing exactly at that level, giving an indication for a very likely continuation of the bullish rally as soon as the price reaches that point.

SPY

Therefore, the recent performance of the SPY, together with the technical indicators on the daily chart confirm our bullish stance on Netflix at around the psychological support line at $400.

In order to get a further confirmation that buying Netflix at the key support at $400 would give us a chance to maximize our followers’ profitability, we have decided to analyze the recent performance of the XLY (Consumer Discretionary Select Sector SPDR Fund). The reason we will use the XLY for this analysis is because of the strong 93% correlation between the SPY and XLY. So, in case the XLY confirms our bullish expectations for Netflix we would be able to buy the stock at the key support line and be able to make high profits to the upside.


So, by looking at the daily chart on the XLY we should say that similarly to the SPY there has been a massive uptrend in the past 6 weeks since the 18th of March. Traders and investors have clearly been taking advantage of the massive sell-off that had occurred and started buying after the huge correction from $132 towards the key support at $85 (36%). Such corrections don’t happen often and considering the fact that we had been in the longest bullish rally in the history of financial markets since 2009, one should realize that this was an amazing buying opportunity that gave investors a chance to maximize their profitability to the upside. On the way up the price managed to break a few key resistance levels, similarly to the SPY and Netflix to reach the $118 highs, followed by a profit-taking correction towards the lows at $112. It was only logical to expect such a profit-taking correction after the huge bullish rally that had recently occurred.

The daily chart shows the key support line standing at $106-$110 where lots of buying pressure has been taking place in the past. Moreover, the 50-day moving average is currently matching with the support mark at $107, while the RSI remains very bullish and giving further bullish indications.

Furthermore, the 23.60% Fibonacci retracement level stays exactly at the support mark at $108. The Fibonacci indicator is a very useful way for identifying from what level the price will start reversing back to the upside and continuing its strong bullish rally. We believe there will be lots of buying pressure as soon as the price hits the $106-$110 support and investors will take advantage of the short-term correction in order to maximize their profits to the upside.

XLY

Conclusion

Therefore, the current price movement on both XLY and SPY confirm our bullish stance on the Netflix stock and give us a further indication that buying the stock at the strong psychological level at $395-$400 would give us a chance to make high profits to the upside. Therefore, considering that Netflix is currently standing at $415 we would prefer to wait for a short-term profit taking correction towards the support at $400 where we will start buying the stock aggressively. In case the price makes a further drop we will be interested in adding more to our buy positions at the next strong support mark currently standing at $380, which will give us a chance to improve our average cost basis and maximize our profitability to the upside.

We will be looking to cash in some of our profits when the price reaches our first target at $415, followed by the longer term target at $430-$440 where we will be fully cashing in our profits and waiting for another correction that would give us a chance to buy again and boost our followers’ profits again.

We at Dow Experts enjoy analyzing the market and helping our followers maximize their profitability by following our trading and investing ideas, which are always supported by our rational investment approach.

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Sincerely,

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