Since 2012, Netflix has had a massive first mover advantage in the online streaming space allowing it to develop the market and become the standard within a Secular Trend.

When considering Fast Trades for easy money we look at companies with a strong Investment Thesis combined with a technical chart pattern and a dislocation from the broader market, or sector, that sets up a 90% probability of success from a low risk entry point using a defined strategy.

INVESTMENT THESIS

The full Investment thesis can be found in the MoneywiseHQ Portfolio here NETFLIX (NFLX) INVESTMENT THESIS

The Investment Thesis for Netflix is founded on three pillars

1. BEST IN CLASS STREAMING

Netflix has the largest content library and is directing efforts towards original content production for global markets. 

Secular trend towards online streaming – societal behaviour towards entertainment consumption has shifted from the advertisement based network system towards the ‘anytime/anywhere/as much as you want’ subscription service. Anyone with an internet can watch Netflix.

2. GLOBAL MARKET

Netflix has diversified itself away from a North American domestic market towards a globally diversified strategy. This provides unlimited market potential and increased stability as macroeconomic conditions fluctuate between regions.

3. EXPONENTIAL SUBSCRIBER GROWTH

Exponential Subscriber Growth – looking beyond the number of subscribers added currently, it’s important to recognize the self fulfilling trend. Where a household of 2-3 children grow up with Netflix, they effectively become future subscribers.

The Trade Thesis is founded on three platforms.

1. Stay at Home – With Covid-19 cases rising globally, governments have been imposing stricter lockdown measures.
2. Sector catch up – There are two primary competitors in the space currently which investors have been aggressively buying. Disney and ROKU have each risen over 40% however Netflix is near a six month low.
3. Technical Trading Range – The stock price has been trading within  a well defined range.

RISKS

Vaccine – There will be a vaccine. Stay at home restrictions will end. This could result in a Netflix subscription decline.

Content Production – One of Netflix’s strengths is original content production to draw new subscriptions. Covid-19 restrictions limit production.

Big Money Managers – chase momentum and have a choice which companies within a sector they invest in. They may have to rotate out of Disney or ROKU to accumulate shares in NFLX.

Technical Support – a breakdown below $460 could see the share price fall a further 10%.

Broader Market selloff – The S&P500 is at an All-Time high after the best November since 1987. If the broader market pulls back Netflix may follow.

THE NETFLIX+ DISNEY AND ROKU DISLOCATION

ROKU 

ROKU has been in an up trending channel since July, however institutions have not been accumulating shares since October even though prices have risen. This is also reflected in the Money Flow, which is lower than the October ‘Overbought Level’.

Within the Supply/Demand equation, the indicators reflect that the price has risen due to a lack of supply (no selling), and that demand is from retail investors, not institutions. 

DISNEY 

Disney Theme Parks remain mostly closed or under restrictions and the latest headline reads (Click for link) Disney increases layoffs to 32,000 workers as coronavirus batters its theme park business. At the right price and technical chart pattern, Disney will represent excellent value as a long term Reopening/Recovery stock in the future – but this is a Netflix Fast Trade.

The strength of the stock price has been on a breakout above $132 after the Q3 Earnings report which showed very strong subscriber growth in its Disney+ streaming segment (viewed as a competitor to Netflix).

Institutions have not been accumulating shares on this price breakout and this is reflected in the flat to downtrending Money Flow.

TECHNICAL ANALYSIS

NETFLIX (www.stockcharts.com ticker NFLX)

Money Flow Index (80 indicates ‘Overbought’ 20 indicates ‘Oversold’) Current 50: Money Flow into the stock has been in an uptrend recovering from an ‘oversold’ condition in early November. At 50 there is room to the upside towards the price targets of $510 and $550.

MACD Momentum: Has been flat at a low level for four weeks. When the BLACK line turns upwards and crosses above the RED line, this is a BUY signal.

On Balance Volume (OBV) (indicates accumulation or selling of shares by large Financial Institutions): Shares have been under accumulation by Financial Institutions, recovering from an ‘Oversold’ level. If shares continue to be accumulated the Supply/Demand equation will force share prices higher.

TECHNICAL SUPPORT: $470 a break below this price could see shares decline to $430 then $410.

PRICE TARGET 1: $510

PRICE TARGET 2: $550

What does that mean at MONEYWISEHQ

When considering Fast Trades for easy money we look at companies with a strong Investment Thesis combined with a technical chart pattern and a dislocation from the broader market, or sector, that sets up a 90% probability of success from a low risk entry point.

Within the market there are currently two investment themes

1. Stay-at-home
2. Reopening/recovery

Money always flows, it never disappears. For the first six months of the pandemic, money flowed into the the Stay-at-home theme, which Netflix fit perfectly. Through November, as Vaccine headlines took over, money flowed into the Reopening/recovery stocks, airlines, oil, financials.

Over the long term, the Reopening/recovery theme will become dominant and the Stay-at-home theme will phase out. However, it is important to remember that Covid has accelerated the adoption of many Secular Trends and streaming video is likely to endure as a permanent shift, which should provide an underlying support to the stock price as Big Money Managers maintain it as a growth portfolio holding.

In that transition from the Stay-at-home theme to the Reopening/Recovery theme there will be headlines which spike the stock prices of each group as the money flows. That is where the Fast Trade easy money is made.

Money also flows between stocks within a sector. The dislocation can be seen between Disney, Roku, and Netflix. Disney and Roku have had significant price moves but institutions have not been accumulating shares and Money Flow is trending downwards as prices have risen. Netflix is at a Low price, however, institutions have been accumulating shares and money has been flowing into the stock. This reflects money is rotating. This is ‘Demand’ in the ‘Supply/Demand’ equation and can theoretically push the stock price up.

Rule Number 1 in investing “If you don’t protect your money, somebody else is going to take your money”. It’s important to understand the risks of a Fast Trade and follow a disciplined Strategy.

STRATEGY

1. Accumulate shares in the low risk $470 – $480 range near Technical Support. Maintain a disciplined STOP LOSS at $465 and re-enter the trade on a subsequent rise above $470. Consider taking profits at $510 or at $550.

Please consider reading ‘TRADING AROUND A CORE POSITION’ for a NETLFIX trading strategy within a long term portfolio.