Netflix Stock Predictions: Take Your Profits On Netflix

motek 1The Netflix stock predictions article was written by Motek Moyen Research Seeking Alpha’s #1 Writer on Long Ideas and #2 in Technology – Senior Analyst at I Know First.

Summary

  • NFLX was trading less than $370 when I made my April 5 bullish Netflix stock predictions. The stock closed at $527 on July 16.
  • A capital gain of over 30% should be enough. NFLX went as high as $573 but the market is again feeling nervous. It dropped by more than 9% after Q2 ER.
  • Yes, the pandemic is still ongoing but I believe NFLX has maxed out its tailwind from COVID-19. I don’t expect substantial global subscription growth.
  • The persistent pandemic is forcing companies to reduce operations. This is leading to a global-wide employment loss.
  • Pandemic-caused job cuts is bad for Netflix’s paid subscription business model. Most people cannot subscribe to Netflix if they are no longer employed.

I argued last April 5 that the pandemic will boost Netflix’s (NFLX) stock to $400. The stock is now trading at above $525. I strongly recommend you take your profits on NFLX. The stock price has risen more 30% since April 5. It is only proper we reap the winnings while the stock market is still not worried too much of the rising COVID-19 infections. A bad update from the World Health Organization could cause a rapid market downturn like (what happened last March).

NFLX has a YTD gain of +62.99%. Let us not be greedy. This much profit should satisfy us.

(Source: Seeking Alpha Premium)

Let us sell out of Netflix before the market takes our profits away. The negative reaction after NFLX reported a Q2 earnings miss yesterday saw the resulted in the stock dropping by more than 9%. The post-market sellers did not like that Netflix added 10.1 new global subscribers but still missed Q2 EPS estimates. Wall Street was expecting a Q2 EPS of $1.81. Netflix only reported $1.59. NFLX’s price dropped because it did not meet the lofty expectations of Wall Street.

The Q2 ER is actually exemplary. Based on the chart below, Netflix grew its quarterly revenue by almost 25% year-over year to $6.148 billion. Its Q2 net income of $720 million is also 265% year-over-year higher than Q2 2019. On the other hand, the Q3 guidance is prima facie evidence that management expects a slower growth rate. This is in line with my verdict that Netflix’s pandemic tailwind is getting weaker. Better sell NFLX now while it still trades above $500.

(Source: Netflix)

Not Meeting Wall Street’s Expectations Often Leads To Stock Price Decline

NFLX has breached super-overvalued status. NFLX’s forward GAAP P/E to 80.43. The forward EV/Sales ratio is also space-high at 9.71. These two important valuation metrics are almost 300% higher than sector average ratios. This is largely why I’m now rating NFLX as a sell-at-a-profit stock. Wall Street’s torrid love affair with NFLX will quickly wane if the company keeps missing EPS or revenue estimates. My fearless forecast is that NFLX could drop to below $450 if it reports another EPS miss for Q3. High-flying stocks like NFLX gets punished if they do not live up to overhyped valuations.

(Source: Seeking Alpha Premium)

The obvious risk for NFLX is that pandemic-affected companies are implementing job cuts and other cost-cutting measures. The high valuation of NFLX is bound to dive when there’s a global-wide headwind from job losses. It is now difficult for Netflix to sustain its 29% 5-year revenue CAGR when people are losing employment due to COVID-19. A monthly streaming subscription is not essential to people who are now out of work due to the pandemic.

The risk now is that NFLX’s annual revenue growth rate could drop below 20% if this pandemic persists beyond 2020. The lofty valuation of NFLX could suffer if its forward revenue CAGR goes 15% or below.

(Source: Seeking Alpha Premium)

I suspect that competition from other paid streaming platforms like HBO Max and Disney Plus can slow down Netflix’s international growth potential. HBO Max and Disney Plus are now also available here in the Philippines. NFLX cannot sustain its super high valuation ratios because new multinational companies like Comcast (CMCSA) are launching their own paid streaming platforms. In other words, Netflix’s core industry is getting more crowded. Too many players in any industry is harmful. Overcrowding often leads to price wars. It is hard for investors to justify a forward GAAP P/E of 80 for NFLX if it cannot ever deliver quarterly EPS of $2.

(Source: Statista)

Netflix’s long-term bottom line performance has a headwind from new rivals like WarnerMedia and NBCUniversal. The expansion of Netflix in Southeast Asia is also threatened by Tencent’s (TCEHY) recent purchase of iFlix. Sell NFLX now because its stock price could trade sideways or drop below $500 because of rising competition and growing job losses due to pandemic.

Final Thoughts

My profit-taking sell recommendation for Netflix is not compulsory. Sell only now if you need the money to buy other undervalued stocks.  You may also hold on and wait until NFLX rebound to above $570. I am not infallible. NFLX could even hit $600 before 2020 ends. NFLX only needs to meet Q3 EPS and revenue estimates and the stock market will likely boost it to above $550. An official announcement of a true vaccine against COVID-19 can also makes investors euphoric and super bullish.  

If you can hold on to NFLX for more than 6 months, I Know First has a super bullish one-year forecast score of 446.52 for it. The predictive AI of I Know First is highly confident that NFLX will likely trade at higher price levels than $527 within the next 12 months. If you have no immediate need to cash out your profits, hold on to NFLX and you could sell them at a higher profit.

Past I Know First Netflix Stock Predictions Success

I Know First was successful with Netflix stock predictions. On April 2, 2020 the I Know First algorithm issued a bullish Netflix stock forecast and the algorithm successfully forecasted the movement of the NFLX stock.  Up to July 15, NFLX shares rose by 43.72% in line with the I Know First algorithm’s forecast. See chart below.

Here at I Know First, our algorithmic trading AI have modeled and predicted assets price movement worldwide for short-term and long-term time horizons, ranging from 3 days to a year. We provide forecasts for institutional clients, as well as private investors to identify the best investment opportunities in the market. For example we have artificial intelligence stock prediction, aggressive stocks, top tech stocks as well as forex forecaster, and Apple stock news. Today, we are producing forecasts for over 10,500 (and growing) assets, including commodity forecasts and gold predictions.

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