(Note: The author of this fundamental analysis is a financial writer and portfolio manager. He and his clients own shares of NFLX.)
Netflix Inc.’s stock (NFLX) fell hard after the company reported less than stellar subscriber additions in July, causing shares to plunge by over 20% from its highs. But shares have rebounded by over 17% since the middle of August. Now technical analysis is suggesting the stock rises by as much as 10%.
Options traders are bullish on the streaming media company too and see the stock rising by over 5% by the middle of October. The company is due to report third-quarter results on October 16.
The stock has been rising along a bullish uptrend since the middle of August. But so far technical resistance around $375 has not allowed the stock to advance further. The uptrend and the resistance level have created a bullish technical pattern known as an ascending triangle. Should the stock price rise above $375, as the pattern suggests, it would signal a technical breakout, resulting in the stock rising to $405, an increase of about 10% from its current price around $370.
Bullish momentum has been returning to the stock as measured by the relative strength index (RSI). That is because the relative strength index has been trending higher since the middle of August. (For more, see also: Netflix May Rebound by 15% on Bullish Momentum.)
Bullish Options Bets
Options traders are betting shares rise by October 19, after the company releases its third-quarter results. The open interest for the call options betting the shares will rise outweighs the put options, which are bearish bets. The $370 calls have an open interest of about 13,000 contracts, almost double the number of puts at that strike price. It is a massive wager too, with the value of the open calls at almost $28 million. For a buyer of the calls to earn a profit the stock needs to rise to more than $391, an increase of over 5%.
NFLX Price Target data by YCharts
The average price target on the stock has been rising and is at $378, which is 6% higher than the previous target at the start of July. (For more, see also: Why Netflix Could Rally 30%.)
Netflix will need to deliver strong results in October. The streaming content company can still add new subscribers at a blistering pace after posting disappointing results last quarter. The stock's current valuation assumes a lot of growth, and if the company disappoints for the second quarter in a row, investors may not be as kind this time around.
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.