Netflix’s share price hits the pause button

Netflix’s [NFLX] share price has had a solid 2020 so far, up just short of 44.4% to 14 September. After a strong performance in recent months, however, Netflix’s share price pulled back last week amid a wider tech sector setback.

Rallying quickly from an intra-day low of $290.25 on 17 March, Netflix’s share price had topped $420 within a month and has remained consistently above $450 since the end of June, hitting an all-time high of $575.37 on 13 July.

Growth in Netflix’s share price stagnated from there and, following a late-August surge, closed 4 September down 1.8% on the previous week at $516.05.

This decrease reflected a volatile period for Netflix’s share price, which jumped to $556.55 on 1 September before falling to an intraday low of $485.98 on the morning of 4 September. It underperformed the S&P 500 Index (-5%), the Dow Jones Industrial Average (-3.4%) and streaming subscription rival Disney (-3.1%) over the same period.

Netflix’s share price continued to fall following the Labor Day weekend, closing at $507.02 on 8 September. It has since slid further and as of close on 14 September it was down almost 14.43% so far for the month, leaving investors wondering whether it can hold its value.

Ins and outs, ups and downs

Netflix undoubtedly falls into the category of companies that appeared to be immune to the negative market impacts of the COVID-19 pandemic.

As global lockdowns drove consumers indoors, Netflix — whose co-CEO Reed Harrison previously said that sleep was one of the company’s biggest competitors — was gifted a vast audience with significantly more free time on its hands.

This drove an extra 10.1 million subscribers globally in the quarter to July 2020, an increase of 273.7% compared to Q2 2019 (a quarter during which, for the first time in its history, Netflix actually lost US subscribers). Revenue for Q2 2020 was a target-beating $6.15bn.

Following these giddy heights, realism soon began to set in, with the company itself predicting just 2.5 million new subscribers in Q3. While this may feed into the recent flattening of its share price, the volatility of the week to 4 September is more complex, reflecting an eventful week for the streaming platform.

On 31 August, Techcrunch reported that Netflix was extending a free service offering it had trialled in a number of markets to its global audience, in a bid to attract more subscribers. The announcement was greeted optimistically by investors, with stocks rising to the peaks seen on 1 September.

This was soon shattered by widespread pessimism across US markets as a whole on 3 September, which began the pullback in Netflix’s share price. The announcement of better-than-expected US unemployment numbers on 4 September provided a brief reprieve.

This good news for the economy didn’t boost Netflix’s share price, however, as it suggests less people are going to have time to sit around and stream TV shows at home. Some investors concluded that the conditions which had driven the company’s improved performance were over and the stock fell, despite a report by Piper Sandler in August suggesting 41% of new Netflix subscribers plan to keep their subscriptions once normality returns.

What do analysts think of Netflix?

Not everyone thinks Netflix needs to be worried yet, though. According to Scott Knapp, chief market strategist at CUNA Mutual Group, the pullback across tech could simply be a market correction following exuberant overpricing of the industry’s shares in recent weeks.

Part of this overpricing almost certainly reflects short-covering arising from SoftBank’s acquisition of $2bn worth of call options on various tech stocks, including Netflix, earlier this year

Analysts, however, remain optimistic in the short-term. The consensus among 42 polled by CNN Money was to buy the stock, with 21 holding this rating. Forecasters predict Netflix sales will increase to $6.4bn for Q3 and earnings per share will rise to $2.11 during this period.

Longer-term, the forecasts remain positive. The median 12-month adjusted target for Netflix’s share price given by 37 analysts is currently $550 — a 15.5% increase on the latest price — with a high target of $625. However, some are much more pessimistic, providing a low forecast of just $220.

It appears some analysts still feel that Netflix’s share price performance could drop to pre-pandemic levels.