Tech stock rerun?
01/03/18

The question of whether the FAANG names could follow up on their epic 2017 gains in 2018 was answered—at least for a day.

Facebook, Amazon, Apple, Netflix, and Google (sorry—Alphabet) were all flashing green yesterday, helping tech stocks start the New Year much as they spent most of the last one—ahead of the pack. And Netflix (NFLX) was the big dog in the group, jumping more than 4% to trade above $200 for the first time since early November, amid reports it was a possible acquisition target of fellow FAANGer Apple (AAPL).1

Speculation, of course, is something Wall Street and Hollywood have very much in common, and the logic underlying the “news”—that Citi analysts had published a note putting the odds of an Apple-Netflix deal at 40%—was met with skepticism in some circles.2

Nonetheless, yesterday’s move positioned NFLX to close at its second-highest price ever and pushed it toward the upper portion of the choppy range that has dominated its trading since mid-October.

Netflix (NFLX), 3/18/16 – 1/2/2018

Source: OptionsHouse

Like any good movie, there are a couple of plot lines at work here. First, was this moon shot a one-time “buy-the-rumor, sell-the-news” event, or a sign of an imminent momentum expansion? Second, if no AAPL-NFLX deal materializes, is NFLX still capable of busting out of its range and delivering a longer-term happy ending?

It’s true that moves like yesterday’s often get reversed, partially or completely, in the near-term. (The stock also enjoyed a 3%-plus up day two days earlier, on December 28). Netflix has notched one-day gains of 4-5% more than 120 times since 2002, and its average performance over the next five trading days was mixed (the second day after the big up day was the most likely to be a down day), suggesting short-term momentum is sometimes temporarily exhausted after such moves, regardless of the longer-term trend. Barring confirmation from Apple about a deal—which is about as likely as the company announcing it was abandoning the iPhone business—some immediate recalibration would hardly be surprising.

Netflix (NFLX), 7/6/07 – 1/2/2018. Support-resistance zone

Source: OptionsHouse

But what about the stock’s buzz away from the takeover speculation? Netflix has had an average analyst rating of “overweight” for a while now, but the stock logged a couple more upgrades recently, with target prices ranging from $220-$2413. Goldman Sachs gave the stock a $235 target around the time it was hitting its record highs in mid-October.4 The stock is now a month—and more than $20—removed from its early December low below $180, which is its most obvious chart support level.

Closer by, though, is a support-resistance zone first defined by the July 2017 high (around $191.50) that has turned back several swing moves, up and down, over the past several months. The stock’s most recent surge took it solidly above that zone. If Netflix wants to remain in the spotlight, this area could be tested, but it shouldn’t be violated.

 

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1 Business Insider. There is a 40% chance Apple will acquire Netflix, according to Citi. 1/1/18.

2 Forbes. Is Apple Buying Netflix? Here's Why You Can Ignore Some Analyst Predictions. 1/2/18.

3 Benzinga. Wall Street Praises Netflix's Outlook As Price Increases Begin To Take Effect. 1/2/18.

4 CNBC.com. Netflix gets its most bullish Wall Street call yet from Goldman Sachs. 10/14/17.