Netflix: Decline Is Likely Over (NASDAQ:NFLX)

Netflix, Inc. (NASDAQ:NFLX) reported fourth-quarter 2022 results on January 19, 2023. Despite revenue growth of only 1.9%, Netflix’s share price climbed to $344 in anticipation of robust future demand. The long-term outlook for Netflix remains extremely bullish due to the company’s impressive growth over the past few years, making it a popular investment option among investors. As people spend more time at home, Netflix has continued to perform well despite the ongoing COVID-19 pandemic, which has had a negative impact on a number of industries.

Strong earnings reports, demand for streaming media, high-quality original content, and international expansion provide Netflix with a high growth potential in the coming years. Due to robust subscriber growth and profit margins, Netflix’s revenue has increased by 6.46% this year, from $29.70 billion to $31.66 billion. This article will discuss the most recent earnings reports and price levels at which investors can profit in 2023. The share price of Netflix decreased by approximately 77%, which is an average drop to consider for investors a buy the shares.

Earnings Report

According to Netflix’s fourth-quarter earnings, the company’s overall revenue for 2022 increased by only 6.46%, from $29.70 billion to $31.62 billion. The fourth quarter revenue is $7.85 billion which is slightly lower than the third quarter but up by 1.9% year over year (YoY) from $7.7 billion. The slight increase in growth was solely attributable to a 4% increase in paid subscriptions. Netflix was significantly impacted by the strong dollar last year; however, as discussed in a previous article, the U.S. dollar is expected to decline in 2023 due to its strong peak at the long-term target. According to the financial report for the final quarter of 2022, the number of paid streaming users worldwide rose by 3.43%. Currently, Netflix has around 231 million paid subscribers globally which provide a strong revenue stream for the company and makes it less susceptible to market fluctuations.

Due to an increase in marketing costs for net adds, Netflix’s margins decreased. Marketing expenditures increased by 4.9% YoY and by 46.4% within the quarter, which is a substantial increase. Alternatively, technological and development expenses increased by 4.7% YoY. The gross profit margin decreased by approximately 90 basis points because the percentage increase in cost revenue exceeded the percentage increase in revenue as the company spent more on content.

Due to higher expenses, Netflix’s operating income decreased by 12.9%, and its operating margin fell by 120 basis points. However, 2022 has not been an exceptional year, and Netflix’s projected revenue for the next quarter is $8.18 billion, an increase of 4.2%. Since inflation is down to 6.4%, but not under control, and the Federal Reserve is expected to increase interest rates further, market risk is still high. However, higher interest rates are not particularly beneficial for the U.S. economy, and the U.S. dollar is expected to decline in 2023, based on the recent geopolitical tensions. I believe that Netflix’s share price will increase through 2023 due to a strong stock market recovery and rising online streaming demand. In my opinion, the Netflix share price will continue to climb higher in 2023.

Technical Development

As shown by the monthly chart below, Netflix’s price is rising progressively in a strong uptrend channel. The share price at the apex of the blue channel represents a strong buying opportunity for investors attempting for high levels. Relative Strength Index (RSI) is a good indicator for Netflix to buy below 50 levels on the monthly chart; however, the price currently has an RSI below 30, indicating that Netflix has entered the oversold region and experiencing a strong price rebound.

History tends to repeat in financial markets due to the psychological and emotional factors that drive market participants. This is reflected in the patterns observed in price and volume data from the past, which are believed to be indicative of future market behavior. Each time Netflix reaches the blue channel resistance and begins to correct lower, the correction occurs between 75% and 85% in price. The share price dropped by 78% from 2004 high of $5.68 to 2005 low of $1.27. The drop was considered a buy for investors and the price go much higher as seen in the chart below. A similar pattern was observed when the price dropped by 83% from $43.54 to $7.54 in August 2012. Each of the major declines by an average of 80% was accompanied by a subsequent strong upward movement. A recent price decline of 77% from the 2021 peak of $700.99 to the 2022 low of $162.70 is also supporting the long-term trend line, whereby the level is considered a strong buying pivot for investors.

The question is where investors can consider buying Netflix shares, given that the price is already rising following the announcement of fourth-quarter earnings. As evidenced by the 2004 and 2011 drops, each drop carries the potential for a double bottom. That is, the price rebound from the support line of an average 80% decline and then drops again to establish a double bottom on the level. The double bottoms are marked by a blue arrow on the above chart. This scenario is also applicable to the present circumstance. If the price of Netflix drops back to levels between $165 and $200, this would be a strong buying opportunity for investors.

Conclusion

Netflix has been a good investment in the past and has the potential to be one of the best investments in the future, based on the preceding discussion. The 75% to 85% decline in the stock’s value is regarded as an excellent buying opportunity. Currently, the price of Netflix has dropped by 77% from its all-time high of November 2021, but based on the previous price structure, a double-bottom scenario is missing. The current Netflix share prices represent a compelling buying opportunity. If the price falls back to $165-$200, this price range should be used to accumulate positions in Netflix, as it is likely that the price will form a double bottom and rally higher.

In conclusion, Netflix is expected to go much higher from here, however, another decline to $165 to $200 is possible. A drop to $165 to $200 levels is considered a strong buying opportunity for investors.