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Are there any chances for Netflix to flip its downtrend?

Netflix

The Article is written by Tina Teng & Kelvin Wong, Markets Analysts, CMC Markets APAC & Canada

Rebound or plunge? How will Netflix steer the tone for tech stocks in the current Q2 US earnings season? Well, since the beaten-up growth sectors have been trying to flip their respective downtrend moves at the start of the second half, investors may rather see the bright sides than the downsides. As for Netflix, a slowdown in its net additions of subscribers has whacked its share price by -69% year-to-date. Now that the live streamer is set to join the $160 billion global video advertising market, analysts’ matrix to value the stock may need to be altered too.

No optimism for the growth of subscribers in the second quarter

The growth in Netflix’s new subscribers has been declining since the final quarter in 2021 due to fierce competition, the Ukraine-Russia war, and certainly the economic headwinds. In the first quarter, Netflix lost 200,000 subscribers, and worse, it has forecasted to lose 2 million users in the second quarter. The company’s subscribers were 221.6 million in the first quarter, which is still the highest among rivals, such as Amazon Prime, Disney Plus, and Hulu. There is almost no chance for Netflix to flip a slowdown in the growth of its subscribers in the near term, but any numbers that manage to beat expectations are likely to be seen as a bullish factor for the stock.

Apart from slow growth in subscribers, rising costs of filming and a strong US dollar will also likely put downside pressure on the profit margin. Netflix has adopted a sharing password plan outside of households in three Latin American countries, but it seems not to be successful so far. It is expected that Netflix will report earnings per share of $2.90 in the second quarter, or a 2.4% drop from a year ago. According to Zacks Consensus, the revenue is forecasted to grow by 9.3%, to $8.03 billion vs. $7.87 billion, or a 10% growth in the first quarter.

Focus on AVOD

Netflix has been dedicated to growing users with no advertising as a core value of its business. However, with all the headwinds mounting, the live streamer has decided to introduce advertising-based video-on-demand (AVOD), a cheaper ad-supported plan for new subscribers. Netflix also named Microsoft its technology and sales partner to power the offering. Therefore, the matrix to value the company’s performance may be slightly different going forward. The number of new subscribers will not be the only primary measurement of growth; the revenue from advertisements needs to be integrated into overall sales performance. Hence, AVOC might be a significant factor for investors to look at from a long-term valuation perspective, with some analysts expecting a picking up in subscriber numbers in 2023.

Netflix’s downside momentum has started to fade

Source: CMC Markets as of 15 Jul 2022 (Click to enlarge the chart)

Its major downtrend phase which recorded a horrendous decline of -77% from its all-high of 700.43 printed on 17 November 2021 to 12 May 2022 low has started to stabilize and traded sideways in the past 10 weeks.

Several positive technical elements have emerged; its price action last Friday, 15 July 2022 staged a rally of +8.2%, its largest single-day return since 31 January 2022. Also, it has pierced through its 55-day moving average (that has capped prior rallies since 30 December 2021) with a daily close above it. In addition, the daily RSI oscillator (a gauge of price momentum) has started to form a series of “higher lows” since its bullish divergence signal that was flashed out at its oversold region on 11 May 2022.

From a technical analysis perceptive, these observations suggest that the impulsive down move sequence of its major downtrend phase from 17 November 2021 high to 12 May 2022 low may have reached an inflection point for a pause to kickstart a medium-term corrective rebound phase.

Watch the 162.70 key medium-term pivotal support for a potential push-up to retest its intermediate resistance at 248.00 (the lower limit of the gapped down zone formed on 19/20 April 2022 post Q1 earnings results & upper boundary of the descending channel from 17 November 2021 high). A break above 248.00 may add impetus for a further corrective up move towards the next resistance at 329.90.

On the other hand, a break with a daily close below 162.70 invalidates the corrective rebound scenario for a continuation of its impulsive down move towards the next supports at 129.30 and 85.50 (swing lows areas of August 2015/February 2016/July 2016).


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