Thursday, May 19th, 2016

Why Netflix stock is on the rise?

Shares of Netflix have rebounded 40 percent in just 5 session in 2012. Why?

There is a  story behind it.

The worst performing stock of 2011 that dropped from 300 to 67 in just under 3 month period is now making a comeback. You know in stock market the memories are on short lease. Those who get burnt get out and curse and never come back, but those who don’t get burnt, take another stab at the perpetrator. Click to enlarge chart.

This is exactly the case with Netflix which was pummeled by short sellers and written off for good after it changed consumer pricing and refused to budge on its business model. The consumers bitten by a deep recession, whose only sole viable home entertainment was a Netflix movie in front of a TV and who got one upped by a company they relied so heavily were clearly upset and pulled the chain on them.

Netflix lost about a million customer in the fray. Not a good decision by any CEO to lose nearly 1 million paying customers. He could have reversed his decision but he didn’t. When the subscriber base became thinner , the stock tumbled and the short sellers followed in total frenzy. The stock lost its luster and dropped one day at the height of US debt crisis and total pessimism just about 40 points and than it kept dropping like a lead balloon. The party was over for Netflix and the stock got lodged at 70 and technically started building a base with low volumes and no interest. The company fundamentals meanwhile didn’t change that much.

The company kept trying this deal and that deal and working with studios to enhance its capabilities to deliver content to customers, but nothing impressed once burnt stock holders who have abandoned the ship. So one good news after another  did not do beans for the stock and it languished, because the pessimism in 2011 was it its peak , specially after the US credit downgrade. It was an unspeakable time.

Then  just a new piece of press that Netflix is going to widen its services in UK caught the eye of the traders. The base the stock was building since November had matured, and the stock broke out from it after 2 month on January 4, 2012 and has rallied hard.

If things go right and Netflix does not makes any new blunders the stock should recover to 150 and higher in a good market. There is no reason why it should languish at 70 for ever. After all this was a NASDAQ darling at 300 as recently as 6 months ago.

I will be trading Netflix share here at 98 with $2 stop loss and once it gets over 100 I will add half more to my original position and average up not down and hold it to see how far we can go this quarter. If nothing works out I will be out $2 and that is it. That is the total risk for me.

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