Where’s a safe harbour? Medium-term forecast for Netflix stock’s cost

Dear friends,

Continuing the search for investment opportunities amidst global crisis, I’ve made a forecast for Netflix – one of the biggest content producers and media providers in the USA and the whole world.

Let’s start with a fundamental overview:

Netflix is a quite young company based in 1997. The company was registered in the small City of Scotts Valley, California, 10 km north of the regional centre – the city of Santa Cruz. The Netflix company is currently headquartered in Los Gatos, California. The staff numbers over 8,600 people. Shares outstanding: 438.81 million; general capitalisation: $146 billion.

Financial indicators:


The first indicator we see in the chart above – PE (price-to-earnings) Ratio – slowed down because of stock price depreciation and slower growth of profit indicators. Still, the current PE Ratio of 87.154 is high, much higher than the average market value of 11.5 and the industrial value of 15.2. In the current circumstances, these numbers show the investor’s support and confidence in the company’s future.

No doubt, this optimism is linked to Netflix’s big popularity as a media platform and its contracts with the big owners of such franchises as Game of Thrones and Star Wars. Another promising project is a deal with Nickelodeon to launch joint content production, which will be serious competition to another media giant Disney.  However, despite this strong optimism, Netflix’s growing total debt of $14.8 billion has become a real concern (the second upper chart). It grew 17 times over the last 5 years.

To be just, I need to mention that the company’s total equity ($7.582 billion, fourfold growth in 5 years) and net income ($1.87 billion, sevenfold growth in 5 years) grew as well (the middle chart and the bottom chart, respectively). So, we see that the rate of total debt growth is much higher than the equity and income growth rate, the current gap approaching a terrible value of 200%. On the one hand, Netflix is an online entertainment platform and the number of subscribers may sharply grow because of quarantine and self-isolation measures.  On the other hand, it’s hard to estimate the consequences of the crisis at the moment. If the economic recession will affect the people’s real income, the number of subscribers may decrease.

The Free Cash Flow indicator confirms the concerns. Starting from 2014, it has been in the negative zone with stable negative dynamics. In 2019, the FCF deficit amounted to 3.14 billion USD. The growing deficit points to blowing up the debt bubble. The current profit isn’t enough for covering current expenses, including debt payments, which results in taking out more loans to cover previous payments. During a crisis, such a situation may be very dangerous and the investors need to consider that.

Technical analysis 

General wave structure


The chart above shows the wave structure of supercycles on the monthly time frame. This is the proper position of waves because it respects the third wave’s relation to the first one. It’s a long wave without an excessive extension and the triangle being formed fits perfectly into the structure of the fourth wave, where it most often occurs.

Graphic analysis and analysis of indicators


In the chart above, the fourth wave of the super cycle is shown on the weekly time frame. We see a powerful retracement after panicky sales. Still, it wasn’t supported by indicators. MACD is still pointing to a bearish retracement and diverges from the price chart. MFI shows a squat false candlestick while the MFI oscillator has just begun leaving the area of overboughtness and is directed downwards. At the same time, the graphic analysis definitely shows a strong support zone at 285 – 300 USD, which means wave E is expected to end exactly in that zone and a reversal may begin there. So, it’s where entry points may be located. On the other hand, there’s a problem of determining the upper peak. Since wave (3) of the super cycle is long, the peak of wave (5) is very unlikely to be located above the historical peak. So, it must be the area of 420-430 USD.

ABCDE wave structure on the weekly time frame


On the other hand, we can see three potential graphic figures, each of them being equally possible. They are the blue equilateral triangle, the green ascending wedge and the ascending bullish channel with the dotted upper limit. Each of these figures is clearly seen in the chart above. The problem is that none of these figures has a price-confirmed upper limit, so they all are just hypothetical at the moment. 

Thus, I suggest using the target that doesn’t contradict any of the indicators as the upper target, not to look like a fortune-teller. Let’s draw the annual candlestick’s projection.


Most likely scenario


The chart above shows the TM annual candlestick’s projection as the grey triangle, and the tolerance zone as the violet rectangle. The TD differential arrows are differently directed, which points to a sideways movement of the price within this projection. So, we understand that the lower limit of the movement will be located near the lower limit of the tolerance zone and the lower edge of the bullish channel/triangle/wedge. All the levels are located in the area of 280 – 300 USD.

Next, we are very likely to expect a retracement up to the first Pivot resistance line and the triangle’s upper limit at 370 USD. This level almost coincides with the top of wave B, where a strong consolidation occurred in 2019. That’s why this level may be a reasonable target. 

 My trading plan


I’m planning to buy from 300 USD and lower, up to the red key level. The stop loss is placed below that line and trailed upwards, following the incline of the figure’s lower edge. Crossing the upper green level will confirm the development of a bullish pattern. The first target to protect trades: 370 USD. The second target, after a breakout: at around 420 USD. All bearish retracements which may occur within the wedge and triangle patterns should be used for opening additional long positions and averaging into the position.

That’s all for now. Check my next posts for other trading ideas.

Take care of yourself and your money!

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I’d like to remind you that all materials are provided for educational purposes only. They aren’t financial advice and don’t guarantee any profits. All trading decisions you make are your responsibility only.

Best regards,

Michael @Hyipov

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