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Netflix tumbles 20% on declining subscribers! Time to buy or sell?

July 30, 2019 08:55

Did you know that just one week after Netflix released a dire second-quarter earnings report, the company's share price tumbled 20% lower, wiping off $26 billion in market value? Some analysts believe it's time to chill on Netflix and sell, while some believe this dip could be a buying opportunity. One thing is for certain, the mix is creating some very interesting short-term and long-term trading opportunities in the market right now.

Trading Netflix Stock

In this article, we explain why Netflix's share price crashed lower and what could lie ahead for the company's stock price and how to trade it. Let's begin!

Netflix Earnings: The big miss

Traders and investors have always had high hopes for Netflix. After all, they have been the leader in online TV and movie streaming for many, many years. The company's ability to scale up, its library of content and the 150 million-strong worldwide subscriber base gave the company an aura of invincibility on Wall Street.

However, in its latest second-quarter earnings report Netflix stunned Wall Street by losing 126,000 US subscribers, versus Wall Street expectations of adding 352,000 US subscribers. The pain does not end there. Netflix also announced they added 2.8 million new international subscribers. The market was forecasting 4.8 million new international additions. In fact, the company's international growth came in nearly 45% lower than Netflix's own projections.

The company's share price was already starting to fall before the earnings announcement on rumours of lower growth. The decline accelerated on the announcement - which was the company's worst day in three years - and kept on pushing lower until a small rally higher contained the collapse.

While some analysts are confident Netflix can continue to grow other analysts are not so bullish as the competition in online streaming is starting to intensify with Disney+, Apple and WarnerMedia all entering the space. In fact, it seems like the streaming war with Netflix is only just starting.

How to Trade Netflix Stock

Netflix's share price performed quite well between 2016 and 2018 - before the global stock market crash brought its share price down 45% from its all-time high price of $422 made on 17 June 2018. Since then the share price has rallied higher and is - at the time of writing - marginally up for the year. The long term chart below shows Netflix's 2019 low which was made during the first week of the year:

Source: Admiral Markets MT5 Supreme Edition, NFLX, Weekly - Data range: from Nov 15, 2015, to Jul 29, 2019, accessed on Jul 29, 2019, at 5:37 pm BST. - Please note: Past performance is not a reliable indicator of future results.

It's clear to see the recent decline in Netflix's share price which is now threatening the low of the year so far. If the share price breaks below this level of $302, then it will be trading at new lows for the year which could attract more sellers to the market, as well as cause any 'long' traders to bail on some, if not all of their position.

Let's take a look at the daily chart for more clarity:

Source: Admiral Markets MT5 Supreme Edition, NFLX, Daily - Data range: from Jan 24, 2018, to Jul 29, 2019, accessed on Jul 29, 2019, at 5:42 pm BST. - Please note: Past performance is not a reliable indicator of future results.

The above daily chart of Netflix's share price shows the high and low of the year so far. Some traders may consider the sideways price action as confirmation the stock is currently in a consolidation. Active traders may look to trade in between the consolidation by 'shorting' at the horizontal resistance line of the 2019 high or going 'long' at the horizontal support line of the 2019 low.

Directional traders may wait until the price breaks the horizontal resistance or support line and then go with the trend. However, any positions to the downside may be limited as the higher timeframe, the weekly chart, is showing a strong ascending bullish trend line where longer-term buyers may start to build positions, as the chart below shows:

Source: Admiral Markets MT5 Supreme Edition, NFLX, Weekly - Data range: from Nov 15, 2015, to Jul 29, 2019, accessed on Jul 29, 2019, at 5:50 pm BST. - Please note: Past performance is not a reliable indicator of future results.

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For instance, Admiral Markets' demo trading account enables traders to gain access to the latest real-time market data, the ability to trade with virtual currency, and access to the latest trading insights from expert traders.

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