What's Behind Netflix's Recent Weakness?

Netflix Inc NFLX shares have held their own despite the turmoil of the COVID-19 pandemic, thanks to strong subscriber additions facilitated by the lockdowns in force globally. 

Netflix Shares Peak, Pause 

The streaming giant is among the best-performing S&P 500 stocks year-to-date, having gained about 42% through May 19, when it hit a record high of $458.97.

The momentum en route the record high had to do with the strong quarterly results reported by the company, driven by a surge in paid net subscriber additions to 7.5 million. The strong numbers, incidentally, left Wall Street wondering about the sustainability of Netflix's growth. 

Since the May 19 peak, Netflix shares have given back some of their gains. A six-session losing streak that started May 18 has led to a 9.7% pullback in the stock through Tuesday.

Netflix shares were trading 0.31% higher at $416.07 at the time of publication Wednesday.

The peak-to-trough decline has been around 12%.

The stock violated a near-term support around $439 during the current downturn and is now precariously perched around another support area.

Source: Tradingview

If the weakness continues, the stock is in the danger of a further pullback below the $380-$381 area, which it touched in a few instances earlier this year.

Netflix stock experienced weakness in March along with the broader market and hit a low of $290.25 March 17, before rebounding much faster than the broader market.

See also: Why Growth In Latin America Matters For Netflix

Netflix Fundamentals Intact

The strong sign-ups for Netflix in March point to strong subscriber additions in the second quarter, as the company recognizes users as paid subscribers only after the trial period ends, BofA Securities analyst Nat Schindler said in a May 13 note.

The analyst also pointed to a decline in Netflix's churn rate in April.

Netflix sign-ups grew by factors of 1.9 in March and 1.6 in April vs. February, Schindler said in another note, citing ANTENNA, a data measurement firm focused on media subscription purchase behavior. The company seems to be getting a lift from both winbacks and direct subscribers as well as from free trial growth, he said. 

The churn rate among subscribers who also subscribe to Walt Disney Co's DIS Disney+ improved from 5% in the fourth quarter of 2019 to a more normal 3% in March and April, Schindler said.

Netflix recently announced it would cancel unused subscriptions. BofA sees this as signaling upside to second-quarter guidance and saving dry power for the second-half.

"While there are significant uncertainties ahead in a recession and exiting shelter-in-place, we see Netflix's structural growth and OTT dominance intact," Schindler said.

Buying The Dip In Netflix? 

Jefferies analyst Alex Giaimo, who recently initiated Netflix shares with a Buy rating and $520 price target, premised his bullish stance on a vastly underappreciated addressable market that provides significant runway for continued double-digit subscriber growth.

The analyst is also optimistic on margins improving, with a path to sustainable positive free cash flow.

Jefferies warned of near-term choppiness, but advised buying dips and owning shares.

The recent weakness has rendered the relatively high valuation now fairly attractive, Giaimo said.

Photo courtesy of Netflix.