Netflix, Inc. (NFLX) stock is trading more than 5% lower in Wednesday's pre-market after the streaming giant missed third quarter 2020 earnings estimates by a wide margin, reporting a profit of $1.74 per share while revenue rose 22.7% to $6.44 billion. Subscriber growth of 3.4 million also missed expectations, adding just 2.2 million new subscribers, with nearly flat domestic growth renewing saturation fears. The company ended the presentation by lowering fourth quarter subscriber guidance to 6.0 million, adding to selling pressure.

Wall Street analysts were pounding the table ahead of the release, looking for a blowout quarter due to lingering headwinds from the COVID-19 pandemic and the failure of Hollywood to resume normal operations. Older demographics who subscribed to the service in smaller numbers over the years were expected to accelerate their cord-cutting activity, but that didn't happen, accounting for a portion of the shortfall.

Key Takeaways

  • Netflix stock is trading lower after the company missed third quarter profit and subscriber expectations.
  • The sell-the-news reaction could reach the $460s.
  • Accumulation indicators are raising the possibility of a long-term top.

In addition, media reports suggest that Netflix lost a substantial number of subscribers following the release of the controversial French movie "Cuties," which was criticized for sexualizing young girls. Wells Fargo analyst Steven Cahill discussed this headwind in September, noting a potentially damaging uptick in subscriber turnover, also known as "churn," with the potential to reduce third quarter net additions by as much as 2.5 million.

Wall Street grew more bullish on Netflix in October, in line with the wave of upbeat commentary, yielding a "Moderate Buy" rating based upon 21 "Buy," 5 "Hold," and 3 "Sell" recommendations. Price targets currently range from a low of $235 to a Street-high $700, while Netflix is set to open Wednesday's session more than $70 below the median $573 target. It makes sense for these euphoric numbers to come down in coming days.

The churn rate, also known as the rate of attrition or customer churn, is the rate at which customers stop doing business with an entity. It is most commonly expressed as the percentage of service subscribers who discontinue their subscriptions within a given time period.

Netflix Daily Chart (2018 – 2020)

Chart showing the share price performance of Netflix, Inc. (NFLX)
TradingView.com 

A strong uptrend topped out at $423 in June 2018, giving way to a steady decline that found support at an 11-month low near $250 in December. A 2019 recovery wave stalled above $390 in April, while renewed selling pressure posted a higher low in September. The stock returned to the 2019 peak in February 2020 and sold off, carving another higher low into March. Aggressive buyers then stepped in, triggering a vertical advance that reached the 2018 peak in April.

The stock broke out immediately and eased into a prolonged test of new support, finally taking off in a June rally wave that posted an all-time high above $575 in July. It then sold off into the 50-day exponential moving average (EMA) in the $460s, carving the first leg of a rectangle pattern that's still in force three months later. As a result, the current downdraft could easily stretch another 30 to 40 points below Wednesday's opening print near the $500 level.

Ominously for bulls, the on-balance volume (OBV) accumulation-distribution indicator has been telling a bearish tale, posting an all-time high when the rally topped out in June 2018 and easing into a distribution wave that ended in December. OBV posted a lower high in January 2019, while multiple breakout attempts into July 2020 have failed. This long-term conflict between price and volume is generating a major bearish divergence that could signal a long-term top.

The rectangle is a classical technical analysis pattern described by horizontal lines showing significant support and resistance. It can be successfully traded by buying at support and selling at resistance or by waiting for a breakout from the formation and using the measuring principle.

The Bottom Line

Netflix is trading lower on Wednesday after missing profit and subscriber expectations, and the stock could reach support in the $460s in coming sessions.

Disclosure: The author held no positions in the aforementioned securities at the time of publication.