Netflix Breakout May Lead to 14% Surge

(Note: The author of this fundamental analysis is a financial writer and portfolio manager. He and his clients own shares of NFLX.)

Netflix Inc. (NFLX) shares rose by nearly 4% to a new record high of roughly $345 on May 23, but more importantly, was the massive technical breakout that occurred. The breakout may result in the stock rising by another 14% in the coming months, taking shares to nearly $390, based on technical analysis. 

Netflix shares have already surged by almost 80% in 2018, an astronomical rise driven by better-than-expected subscriber additions and earnings growth. But analysts are undoubtedly skeptics on Netflix rising higher and see shares falling, with an average price target of roughly $330, nearly 5% below the current stock price of approximately $345. 

NFLX data by YCharts

The Big Breakout

Shares of Netflix have been trending higher since the start of 2018, and after a nearly three-month period of consolidation, the stock finally rose above a technical resistance level at $333. The chart shows a technical pattern called a symmetrical triangle, a bullish continuation pattern, created with the formation of the uptrend and the resistance level. Once the stock rose above the resistance level, it triggered the breakout. Based on the current uptrend and resistance trends, shares of Netflix could rise by roughly 14% to about $390. Additionally, the former resistance level at $333 should now offer strong support if the stock retreats. 

Relative Strength Index 

The relative strength index (RSI) also supports shares of Netflix rising higher, after it broke out, rising above a downtrend. The RSI currently has a reading of approximately 68, and should the reading rise above 70, it would indicate shares have become overbought. 

The last time shares of Netflix broke out in a meaningful way was at the start of 2018 ahead of its fourth-quarter results, leading to shares of Netflix rising nearly 70% to roughly $333 from approximately $200. However, the last time shares had a breakout, the RSI was only 42 and had much more room to rise before hitting overbought levels. This breakout comes with the RSI much higher, and likely means the rise in the stock will not be as strong.

Price Targets

NFLX Price Target data by YCharts

Even though the charts point to shares rising, analysts see shares falling, by about 5% to roughly $329. It isn't because they aren't bullish on the revenue and earnings growth—analysts have upped their second-quarter earnings estimates by nearly 24% over the past 30 days to $0.81 per share, a growth rate of almost 440% over last year's results. Meanwhile, they also upped their earnings estimates for the full year by nearly 6% to $2.88, a growth rate of about 130% over the past year. But in the meantime, it leaves the stock trading at a lofty one-year forward earnings multiple of about 73 times 2019 earnings estimates of $4.70 per share.

Whether or not shares of Netflix rise over the long term from current levels will all depend on the company’s ability to continue to drive subscribers, revenue and earnings growth. But where shares go over the short term may entirely be driven by the technicals and market sentiment. 

Michael Kramer is the founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdings. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.