Netflix’s recent story paints two different pictures. On one side, you have investors who nailed their Netflix stock predictions and benefitted from the surge that followed the global stay-at-home policies. On the other side, you have people who jumped on board after the company released its quarterly results on April 21.
The story for the first group is a happy one, as they gained from an increase in the company’s user base and stock price during the days preceding April 21, even though how happy the story was depends on when they jumped on board.
However, the story for those who bought the stock afterwards is not that pretty, as the stock lagged and ended up delivering a measly 0.5 per cent return since the report was released.
Trade Netflix - NFLX CFD
So, if you are asking what is going on with Netflix stock, the answer is: investors had already priced in Netflix’s momentum before the results were released and, as a result, the price is not reacting any further.
That said, this doesn’t mean you can’t still make some money by trading the shares of this video streaming platform. However, it is important to draft a comprehensive Netflix share price prediction to make sure you know what to expect and what kind of position you should take.
Netflix stock outlook
A NFLX stock analysis shows that the stock started the year on an upward price trend that was momentarily paused by the February-March sell-off. After that, the stock recouped its lost territory, possibly as investors started to realise the potential of Netflix during a lockdown situation.
However, the point at which the stock really gained traction occurred on April 13, eight days before the quarterly report, and we can see how trading volumes took off for at least eight sessions, showing the positive market sentiment towards the quarterly results ahead.
After that, the price went down a bit, possibly as lockdown measures were eased in some places, but then jumped back to where it is now, back at their all-time highs.
NFLX shares are currently trading 11.7 per cent above their 50 DMA and 25.5 per cent higher than their 200 DMA. Meanwhile, the stock is approaching its 52-week high of $440.52, pushing the envelope once again, possibly as a result of expectations that the lockdown may continue for longer than expected if a second wave of the virus hits most countries.
At this point, it is safe to say that the most influential driver for NFLX price is the rate of new cases around the world and this may eventually determine how high will Netflix stock go. If that variable continues to show an upward trend, Netflix stock forecast 2020 will remain bullish.
On the other hand, if the rate starts to decelerate and lockdowns are eased or even fully lifted, the price of the stock is likely to deflate. We will talk more about those drivers in the remaining sections.
Netflix shares news
There are two Netflix share price news that are currently shaping Netflix stock expectations. These are coronavirus-related news and user acquisition news.
Yes, investors are also worried about revenues and bottom-line results, as they should, but Netflix is going to profit from acquiring users at a low cost during the pandemic and these will eventually become long-term subscribers they wouldn’t have otherwise reached. Prolonged stay-at-home policies contribute to that end.
Let’s take a look at the recent numbers the company disclosed as part of its quarterly earnings report.
Netflix fell short on earnings but beat revenue estimates for the quarter, reporting sales of $5.77bn and EPS of $1.57, compared to $5.76bn and $1.65 analysts were expecting respectively.
However, the Los Gatos-based streaming service added nearly 16 million users in a single quarter which is almost twice the number analysts were expecting for the 3-month period and the company predicted that it may add 7.5 million additional users by the end of Q2.
One key element of Netflix’s successful business model is its retention rate. Certain trusted sources indicate that the company keeps at least 60 per cent of its subscribers for 2 years and 55 per cent of them stay for more than 3 years, which contributes to the stabilisation of the company’s revenues over time.
Therefore, it is safe to say that this fresh batch of subscribers Netflix just attracted is in for the long haul.
Netflix stock forecast
With all that in mind, let’s dive into a Netflix share price forecast to help you in deciding if this is the right time to step in or not and how.
Analysts surveyed by Koyfin are forecasting $24.75bn in sales for Netflix by the end of 2020, even though the company has refused to provide guidance for the full year as they have emphasised that this would be “guesswork”, given the degree of uncertainty associated with the outbreak.
That said, that amount of revenues would account for nearly 190mn active paying memberships by the end of the year, assuming an Average Revenue per Paid Membership (ARPM) of $10.8 per month, based on the company’s numbers.
In that context, the $24.75bn revenue estimates seem a bit conservative, especially considering that the company plans to reach that user base milestone by the second quarter of 2020.
We could go beyond that and raise a higher bar by setting revenues at $24.78 instead, assuming the company hits 200mn users by the end of the year.
Meanwhile, analysts are estimating annual earnings per share of $6.41, which results in around $2.9bn of net income for the year.
Based on the company’s historical net profit margins we could use that $2.9bn as our ‘baseline’ scenario, but we could also be more optimistic as profit margins are widening and we could anticipate a potentially higher net income of $3bn if margins are higher than expected which would result in EPS of $6.62.
With these numbers in mind, Netflix is currently valued at around 66 and 69 times its earnings per share, which is a huge valuation multiple, but fairly low for the company’s historical P/E, which has ranged from 100 to 300 in some cases.
That said, nearly half of the 40 analysts surveyed by Koyfin are suggesting that Netflix is a “strong buy” while 11 of them are encouraging investors to hold on to it. In contrast, the price target for the stock sits at $440, which is 0.1 per cent lower than the current price.
Netflix (NFLX): buy or sell?
Before you invest in Netflix stock you should consider a few things. First, the stock is trading below its historical price to earnings ratio, even though the ratio is fairly high as is.
That said, there might be some upside ahead but that will depend entirely on how willing the market is to pay a big premium for Netflix shares. You can choose to profit from subsequent upward movements if you think that might be the case but there is also some potential for short positions if the market decides to go easy on the company’s valuation multiple.
Finally, remember that the pandemic and stay-at-home policies are not going to last for ever and eventually Netflix’s business model will go back to what it was before the pandemic kicked in. There are many rivals seeking to dethrone it, including strong players such as Disney+, Amazon Prime, Roku and this could harm the company’s ability to acquire new users in the future.
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