MorningWord 1/8/14: $NFLX – Red is the New Green?

by Dan January 8, 2014 9:20 am • Commentary

Despite being the best performing stock in the S&P 500 in 2013, NFLX has had a rough go of it so far in 2014, down almost 8%. Most of those losses came yesterday on the heels of Morgan Stanley’s downgrade of the stock from essentially a Hold to a Sell.

The crux of the downgrade is nothing new – competitive concerns, that have yet to meaningfully halt the stock’s ascent. Here is a quick excerpt from the note:

“On the paid end of the spectrum, we think that Amazon Prime Instant Video, HBO GO, and Hulu Plus each offer compelling value to consumers and could gain momentum in 2014 as mass digital distribution is becoming commoditized and more content is becoming available for bidding. We continue to think that Netflix holds up well in comparison to these services, but since Netflix has amassed over 30MM domestic subscribers to date, we think it may be easier for its competitors to gain their next 5MM users than it will be for Netflix.

For the skeptics out there, taking a pessimistic view on the stock based on mundane reasons like valuation may continue to be a dangerous endeavor, until there is some sort of AH-HA moment on the fundamental front like we witnessed in 2011/12 following the Qwikster mess.

For the time being, let’s take a quick look at the technical set up, which in the very near term looks about as bad as it has in a very long time.

The one year chart below shows the stock’s break below the October 2013 closing high prior to the massive reversal on the news of Carl Icahn selling half of his stake, while also blasting through its 50 day moving average (purple line) on the largest volume day since October. In the near term though,. $300 should serve as very healthy support (green line):

NFLX 1yr chart from Bloomberg
NFLX 1yr chart from Bloomberg

On a longer term basis, the 4 year chart below confirms the $300 level (red line) as the next line in the sand for NFLX bulls as that was also the all time high back in 2011, and a fairly significant psychological level on the way back up last year.

NFLX 4yr chart from Bloomberg
NFLX 4yr chart from Bloomberg

NFLX is one of those stories where bulls appear to ask few questions on the way up, but are downright reviled by the stock on the way down.  What’s interesting about the set up here is that despite last year’s fabulous gains, Wall Street analysts remain decidedly negative on the stock with only 6 Buys ratings,  24 Holds and 8 sells.  The Street has obviously been off-sides on the name but rather than embrace the move they have merely raised price targets (currently sits at about $343) and earnings estimates in line with company guidance.

Bulls argue the next leg of the rally is going to come from international expansion.   There are clearly risks, however.  The company saw streaming subscribers surge last year on the success of their original content like House of Cards and Orange is the New Black, but there are no guarantees that these programs will resonate in other locales as they have in the U.S.  We remain just a tad skeptical, given the risk that content costs will at some point soon overwhelm profit growth and make the stock far less attractive.