Netflix Poised For Another Big Quarter

As on my previous article about Netflix stock in Q1 2020 - Netflix Stock Heading Into Historically Bullish Quarter - Wall Street analysts think Netflix (NFLX) will post its second quarter in a row of big subscriber gains thanks to the stay-at-home entertainment boom during the Covid-19 coronavirus pandemic. Netflix stock is in record high territory ahead of the company's June-quarter earnings report this coming week.

Netflix will report Q2 results after the bell Thursday (July 16th) and investors are expecting impressive numbers. Shares soared 8% Friday to a new all-time high of $548.73.

Netflix is having a great year, with shares lifting 70% to an all-time high above $500. This outstanding performance caught many analysts by surprise because The Walt Disney Company's (DIS) Disney+ service, released in November, was supposed to foster a highly competitive environment in which customers would be forced to pick and choose subscriptions within a limited budget. The pandemic tossed that theory out the window, forcing tens of millions into extended at-home stays that have underpinned all sorts of digital entertainment.

In addition, worldwide movie, television, and theatrical production has slowed to a crawl, with the surging epidemic forcing Hollywood, Vancouver, Bollywood, and other production centers to shut down or take on the added costs of isolating cast and crew for months at a time. Movie theaters have also faced massive headwinds in their efforts to reopen, even with limited capacity, forcing the entertainment-seeking public to look for alternatives.

Netflix also benefits from a vast content library that virus-weary subscribers can tap for months or years, if necessary. In addition, the company produces content worldwide, allowing it to grow offerings in parts of the world less affected by the pandemic. Many of these "foreign" productions have better scripts and production values than the endless string of youth-oriented comedies and dramas, allowing the company to keep subscribers glued to their screens.

Higher lows in September 2019 and March 2020 set the stage for an April 2020 buying impulse into 2018 resistance. Netflix stock broke out immediately but failed to make much progress until June, when price took off in a sustained uptick that has now mounted the $500 level. Curiously, accumulation readings have lagged price action since the middle of 2019, but that hasn't stopped the stock from holding firm at all-time highs.

Two technical factors bode well for even higher prices in coming weeks. First, the monthly stochastic oscillator crossed into a long-term buy cycle in February and has held that level without lifting into extreme readings that have generated bearish crossovers in prior years. Second, the breakout still hasn't reached resistance at the 1.618 or 2.0 Fibonacci extension levels. Not surprisingly, Goldman's Street-high call ($640) lies at 2.0 extension, marking a logical target that Netflix could exceed in the third or fourth quarter.

The Bottom Line

Netflix stock has booked impressive 2020 returns as a result of the pandemic and is showing few signs of topping out or rolling over. 

While I'm absolutely convinced that the stock is worth owning, it certainly won't be without volatility. Thus far, investors have been willing to pay up for the likelihood of continued strong growth, particularly since the pandemic is far from over and strong demand for home-based entertainment will likely continue.  

Even given these circumstances and the nosebleed valuation, I would argue that investors with the appropriate long-term time horizon should buy Netflix stock and wait for the thesis to play out over the coming decade.