Are there any chances for Netflix to reverse its downward trend?

JThe article is written by Tina Teng & Kelvin Wong, market analysts, CMC Markets APAC & Canada

Bounce or dive? How will Netflix set the tone for tech stocks in the current Q2 U.S. earnings season? Well, since the battered growth sectors attempted to reverse their respective downtrend moves at the start of the second half, investors might see the upsides rather than the downsides. As for Netflix, a slowdown in its net subscriber additions has sent its stock price down -69% year-to-date. Now that the live streamer is set to join the $160 billion global video advertising market, the analyst matrix for valuing the stock may also need to be changed.

No optimism for subscriber growth in the second quarter

Netflix’s new subscriber growth has been declining since the last quarter of 2021 due to fierce competition, the Ukraine-Russia war, and certainly economic headwinds. In the first quarter, Netflix lost 200,000 subscribers, and worse, it expected 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’s almost no chance for Netflix to reverse a slowdown in subscriber growth in the near term, but any number that manages to top expectations is likely to be seen as a bullish factor for the stock.

In addition to weak subscriber growth, rising filming costs and the strong US dollar will likely put downward pressure on profit margin. Netflix has adopted a plan to share passwords outside the home in three Latin American countries, but it doesn’t seem to have succeeded so far. Netflix is ​​expected to report earnings per share of $2.90 in the second quarter, down 2.4% from a year ago. According to Zacks Consensus, revenue is expected to increase 9.3% to $8.03 billion from $7.87 billion, a 10% growth in the first quarter.

Focus on AVOD

Netflix is ​​dedicated to ad-free user growth as a core value of its business. However, with all the headwinds mounting, the live streamer has decided to introduce ad-based video on demand (AVOD), a cheaper ad-supported plan for new subscribers. Netflix has also named Microsoft as its technology and business partner to power the offering. Therefore, the business performance evaluation matrix may be slightly different in the future. The number of new subscribers won’t be the only primary measure of growth; ad revenue should be factored into overall sales performance. Therefore, AVOC could be an important factor for investors to consider from a long-term valuation perspective, with some analysts expecting a surge in subscribers in 2023.

Netflix’s downward momentum has started to fade

Source: CMC Markets as of July 15, 2022 (Click to enlarge the table)

Its major downtrend phase, which saw an abysmal drop of -77% from its high of 700.43 printed on November 17, 2021 to the low of May 12, 2022, began to stabilize and trade laterally over the past 10 weeks.

Several positive technical elements emerged; its price action last Friday, July 15, 2022, rallied +8.2%, its biggest one-day return since January 31, 2022. Additionally, it topped its 55-day moving average ( which has capped previous rallies since December 30, 2021) with a daily close above. Additionally, the daily RSI oscillator (an indicator of price momentum) has started to form a series of “higher lows” since its bullish divergence signal that was issued in its oversold region on May 11, 2022.

Based on insightful technical analysis, these observations suggest that the impulsive sequence of bearish movement from its major downtrend phase from the November 17, 2021 high to the May 12, 2022 low may have reached an inflection point for a pause to launch a medium-term corrective rebound phase.

Watch the medium-term pivot support at 162.70 for a possible push to retest its intermediate resistance at 248.00 (the lower boundary of the gap zone formed on 19/20 April 2022 after Q1 earnings and the boundary upper part of the descending maximum channel of November 17, 2021). A break above 248.00 could add momentum for further corrective upside move towards 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 bearish movement towards the next supports at 129.30 and 85.50 (zones of the August 2015 lows). /February 2016/July 2016).

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