Netflix Price Target Boosts Hint at Lucrative Trade Idea
Here's a new trade idea for the streaming giant.
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Some readers might be old enough to remember the short positions that I had taken on a few different times in Netflix NFLX, back when that name first faced real competition for its streaming television chrome.
In came Disney DIS Plus and the Disney bundle that included Hulu and ESPN Plus. In came Comcast's CMCSA Peacock and Paramount Global's PARA Paramount Plus. In came a host of competitors with their own legacy driven portfolios of content. How could Netflix have not been overpriced as those kinds of players entered into an arena that had been dominated by one name?
Yet, somehow, each and every time that I played Netflix from the short side going into earnings back in those days, I ended up spending weeks of my productive time simply managing risk as I did my best to minimize the damage. Damage done as Netflix sped off into the sunset and laughed at my foolishness. Not always quickly, but I do learn over time. I learned to avoid shorting Netflix. I mean don't get me wrong. I'll trade anything from either side on a short-term or momentum-driven basis, from Netflix to hubcaps to baseball cards.
That said, I haven't shorted Netflix as an investment for years now. That was a lesson painfully learned. Much to my amazement. Netflix is still the king of streaming entertainment as legacy media continues to rot from within. While those competitors watch their legacy businesses erode, they all struggle to run their streaming operations profitably. Netflix? Yes, Netflix keeps on growing its subscription base and keeps on posting chunky numbers for profitability. Quarter after quarter.
Those numbers are growing larger too, and not just on an adjusted (pretend) basis either. Netflix is still regularly growing GAAP net income and earnings per share. Tip of the cap to Executive Chair Reed Hastings for never losing focus and hats off to Co-CEOs Ted Sarandos and Greg Peters who took on the roles of day-to-day leadership two and half years ago now without the firm ever skipping a beat.
Last Weekend
This past Saturday, Netflix held the firm's annual Tudum event. Netflix Tudum is the firm's global fan-focused event, The event features highlights from shows, and appearances by the casts and creators of hit properties. Sofia Carson hosted this year's event as the firm showcased the show "Stranger Things" and "Squid Games." Lady Gaga performed to promote the upcoming season of "Wednesday" and a new "Frankenstein" movie was previewed.
This Week...
On Tuesday, analyst James Heaney of Jefferies, who is rated at five stars by TipRanks, reiterated his "buy" rating on NFLX, while increasing his target price from $1,200 to $1,400.
Heaney wrote, “The combination of U.S. price increases and one of the best 2H release slates in recent memory (including Wednesday NFL Games) position the company well to achieve at least the high end of the FY25 rev guide.”
Heaney believes Netflix should be able to sustain at least 20% earnings and free cash flow growth through high-margin advertising revenue, the expansion into streaming live sports, and price increases over the next five years.
The very next day, on Wednesday, analyst John Hodulik of UBS, who is also rated at five stars by TipRanks, reiterated his "buy" rating on the stock while raising his target price from $1,150 to $1,450.
Hodulik wrote, "Solid viewership trends, a strong pipeline for new titles, and the favorable industry backdrop give us rising conviction in Netflix's ability to drive subscriber growth, monetization, and margin expansion in the coming years."
Hodulik then added, "With engagement on an upward trajectory and Netflix's share of total TV viewing still at ~8% in the U.S. (its largest and most mature market), we think there is a long runway ahead for potential share gains and viewership substitution from linear TV."
The Chart
A word of caution? Should readers even trust a word of caution from a professional trader who has been wrong on this stock multiple times?
Readers will see the double-bottom pattern that stretched from early February through the end of April that produced the stock's recent breakout. With a pivot point of $999, one might expect the stock's target price to be around $1,200. Yet, here we are, with the stock trading with a $1,241 handle and highly ranked analysts setting target prices in the $1,400s.
Relative strength is running close to technically overbought levels, but that has been true, really since late April. The daily MACD is not so bullishly postured. The histogram of the nine-day EMA is slightly negative as the 26-day EMA runs above the 12-day EMA. That's a sub-optimal setup.
Take some profits if one is already long? We always like to take the principal out of long positions if we can and get down to house money. I won't be getting short this name. Been there, done that. That said, would I buy the shares if there were to be a period of consolidation? I think at the lower end of a flat base where support might come in close to the 50-day SMA could be interesting. That line is a lot lower... at $1,078 right now.
Then again, if one is OK with taking on the risk, the September $1,080 puts are currently paying better than $30 a contract. The October $1,080 puts are paying about $41. Maybe that wets one's whistle. If one is a little jittery about the risk, a trader can get paid roughly $9 to write an $850 October put.
Now, that has my attention. A like number of puts with the same expiration, but lower strike prices, could be purchased in order to manage the risk if one is still nervous.
At the time of publication, Guilfoyle had no positions in any securities mentioned.
