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Asset Watch
Wednesday, January 8, 2025
The bulls resurfaced on Wall Street, as the New Year helped usher in a two-day winning streak for the S&P 500. And as Big Tech outperforms, investors remain committed to many of the winners that delivered double-digit returns in 2024.
However, with Netflix consolidating recently and underperforming on Jan. 6, does the streaming giant still have a pathway to $1,000?
Despite Netflix’s robust financial metrics, analysts have warned that its premium valuation leaves the stock fairly valued on a fundamental basis. Seaport Research Partners wrote on Dec. 27:
“We reiterate our Neutral Rating on Netflix shares, as we believe valuation fully reflects the long-term opportunity set toward which the company needs to execute.”
Although, with live sports an avenue for future growth, the firm noted Netflix is “a large global platform that could attract significant consumer demand…. With the two Christmas Day National Football League games, there were almost no noticeable streaming issues, and the events’ claims as having the second-largest global streaming audience could make Netflix’s case to be a serious contender for future sports rights wins.”
The bottom line? While expanding Netflix’s live sports offerings could further bolster its subscriber base, the stock may have priced in the potential revenue and earnings upside.
Because fundamental valuation is typically used for long-term investing, stocks can move significantly above or below these levels in the short term. Since Netflix has become a momentum stock, it should be analysed from a momentum lens.
Since bottoming near mid-2022, Netflix’s 20 and 50-day moving averages have played key roles in supporting the current bull market. If you analyse the blue and yellow lines, you can see that when breakdowns below the 20-day MA unfolded, the 50-day MA either reversed the weakness, or deeper corrections occurred.
Netflix is already below its 20-day MA, the 50-day MA (near $860), so it could hold the clues as to whether a rally is forthcoming.
The best rallies typically occur when Netflix bounces off its 50-day MA and recoups its 20-day MA. Therefore, with the yellow line poised to keep rising, Netflix should eventually recapture the 20-day MA by climbing above the blue line or break down below the 50-day MA and fall below the yellow line.
To manage risk, it could be prudent to place a stop-loss order $10 below the 50-day MA to avoid a false breakdown and still participate if a meaningful reversal unfolds.
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