Chart of the Day – Netflix: Red is the New Green

by Dan May 16, 2014 1:05 pm • Commentary

Last night Icahn Associates’ 13F filing for Q1 2014 detailed the investment company’s changes in its holdings from Q4 2014.  Of most interest to us was the disclosure that they sold 16% of their Netflix (NFLX) holding, leaving them with about 2.24 million shares or about 3.74%, making them the sixth largest shareholder, after once being the largest shareholder with 18% back in early October.

We have had two bearish trading positions in NFLX, the first initiated on the earning bounce (here) and closed after the stock’s quick gap fill less than a week later (here) and then again just  last week after the stock rallied more than 10% following the earnings low (here).

Given the knowledge of last night’s 13f filing, in hindsight ,NFLX’s decline after its earnings gap is very reminiscent of the reversal in the shares on October 22nd after Mr. Icahn tweeted the following:

Following NFLX’s blowout Q3 results, the stock up opened up 6% at $389, then the tweet, and the epic intra-day reversal with the stock closing down 9% on the day at $322:

NFLX Oct 2013 from Bloomberg
NFLX Oct 2013 from Bloomberg

So looking at last month’s price action, it is curious that the stock had some fairly similar price action after the company’s apparent better than expected Q1 results.  On April 22nd, NFLX opened up 8% and for the most part held most of its early gains.  But the next day with the help of some negative competitive news from Amazon, Netflix had filled in the earnings gap and continued what would amount to be a 21% earnings peak to trough decline over the next 5 trading sessions:

NFLX April 2014 chart from Bloomberg
NFLX April 2014 chart from Bloomberg

As many readers know, the 13f data is delayed 45 days, so Icahn had already sold 16% of his remaining stake prior to the Q1 results in April.  Perhaps, just as he did in October, he used the earnings strength in April to unload some more shares to enthusiastic buyers, and trapped many of them underwater as a result.

Regardless, the technical setup in NFLX in the short-term does not look pretty.  NFLX failed this week around the 200 day moving average (yellow-around $347.50), and the 50 day moving average (purple-around $362)  is steeply declining:

NFLX daily chart, 50 day ma in pink, 200 day ma in yellow, Courtesy of Bloomberg
NFLX daily chart, 50 day ma in purple, 200 day ma in yellow, Courtesy of Bloomberg

The longer NFLX stays below the $350-$360 resistance area, the more likely a retest of the $300 support level becomes.

Finally, NFLX seems to be losing the Net Neutrality battle as time goes on but there were glimmers of hope yesterday on Capitol Hill. From re/code:

The outcry over the fast-lane net neutrality proposal prompted Wheeler to kick the hardest questions down the road.

It could have been much, much worse for Internet companies and net neutrality supporters. The proposal released Thursday was significantly more solicitous of the idea of re-regulating Internet lines under Title II of the Communications Act than many might have guessed just a few weeks ago.

And Netflix issued a statement saying, “Netflix is not interested in a fast lane; we’re interested in safeguarding an Open Internet.”

Was the FCC’s vote Thursday the victory that Internet companies wanted? No. But net neutrality advocates appear to be better positioned today to make the case for Title II than they were a few weeks ago.

As we’ve said in the past, the fate of net neutrality is a huge story to follow for those playing NFLX shares. If ISPs have their way with the FCC it would mean a very advantageous playing field for their own Netflix clones.

The fundamental outlook for NFLX remains ever-evolving, from competition, regulation, valuation etc, but from where we sit the technical set up in the near term appears challenged and it is our view in the near term it would not take much for a re-test of last month lows.  We will play with defined risk.