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Q3 earnings for Netflix could be strong due to a strong ‘Squid Game’

Right now, the hottest thing on TV is a Korean drama with bloody scenes, gripping plot twists, and subtitles. Netflix has it all. You'll need a strong stomach and patience if you missed out on the aggressive breakout, to catch the trend.


Netflix - Weekly Investing Idea



The show Squid Game features 456 participants from different walks of life who must play a series of children's games with deadly consequences in the hope of winning a cash prize.


According to a critique of 'Squid Game', hyper-competition transforms normal people into monsters, but that could also be true of the stock market.


Hwang Dong-Hyuk's Netflix series debuted on 17 September 2021 and within 10 days became the platform's highest-ranking series in 90 countries. There have never been Korean dramas at the top of the charts in the US but currently, 95% of the viewers of 'Squid Game' are outside Korea, challenging the myth that the younger generation won’t tolerate subtitles.


On this monthly chart, we can see how the recent price action started with a breakout of the $570 level with some price targets between $650 and $820 up above. It's the typical bull flag pattern that occurs in stocks with strong uptrends and is likely to become continuation patterns. These flags are called bull flags due to the way they look like flags on poles. Stocks rise vertically in the pole, while flags result from the period of consolidation. When it comes to stop-loss protection for this type of trade. Traders typically set their stops below the entire flag, though if you want to trail your SL up as price rises you can consider such trailing with a two-bar stop.


There is a lot of hype around the new gorefest that is ‘Squid Game’ and it’s just what Netflix needs to keep the subscriptions coming. The production delays in 2020 had led to a lighter release roster for the first half of 2021, though that is building as we come to the end of 2021. management mentioned in the second-quarter shareholder letter that COVID and its variants make predicting the future hard, but with productions largely running smoothly they were optimistic to deliver a strong year-end.


The company expects to add 3.5 million new subscribers in Q3 2021, up 59% year-over-year. The street analysts had initially forecast 5.6 million new subscribers for Q3 and it is all a far cry from the 25.9 million members in the first 6 months of 2020.

Despite these downbeat expectations, it is crucial that we observe the past 24 months in aggregate, as the average subscription per year is still around 27 million, which is in line with previous years of steady growth.


On the Daily chart, the $688.50 price at the 261.80% Fibonacci extension is confluent with a level on the monthly chart and generally, if a price move hits the 261.80% it will follow through to the 423.60% Fib extension, so bar any overall market collapse, the NFLX share price could be in the $800 in the new year.


Netflix is currently trading around 19% below analysts estimated fair value, with earnings forecasted to grow by 23.3% per year. The daily moving averages highlight the new momentum the bulls have found since the summer months and another bullish signal is the way in which the share price held up during a larger index correction in the recent weeks. This could be interpreted as the NFLX share price being less volatile than the other stocks out there. Management expectations coming into the earnings season for Netflix are Q3 revenue to be up around 16% to $7.5bln, with an EPS of $2.55. 3 key data points to look out for will be the Paid Memberships and forward guidance along with average monthly revenue per member. And lastly, the company’s free cash flow.


According to the Monthly and Daily charts, Netflix is within a rising trend, assuming there are no actual misses in the earnings reports. A pullback to previous resistance may be the signal for a new long position. Initially, I would be looking for a return to the October breakout level but if it turns out to be a running trend, I would be looking for pullbacks into moving averages with confirmation signals from an oversold stochastic indicator.


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