Netflix (NASDAQ:NFLX) is down sharply year-to-date. The stock hasn’t been able to recover from its January crash, caused by disappointing subscriber growth in Q4 2021. Furthermore, the decline in NFLX started much earlier, in November, 2021. In total, the stock fell 53% from its all-time high of $701 a share to last month’s low at $330.
Last week, the bulls almost made it to the $400 mark, but eventually lost momentum and closed on a low note again. What interests us, though, is whether this is a buying opportunity or part of an even bigger downtrend.
To find our, we examined Netflix ‘s 4-hour chart through the prism of the Elliott Wave principle. Here is what we found.
It turns out that the crash that erased over half of Netflix ‘s market value is a clear five-wave impulse. The pattern is labeled 1-2-3-4-5, where the five sub-waves of wave 1 are also visible. As it usually happens, wave 3 is the longest and even includes a huge downside gap. Wave 5 looks like a textbook ending diagonal pattern.
All these details, however, are not that important. What matters is that impulse patterns only occur in the direction of the larger trend. An impulsive sequence to the south means we should expect more weakness once the corresponding corrective recovery is over.
We suppose the bulls will try to close the January gap soon. We’d be wary if that happens, though, as the next bearish wave would be just around the corner. Targets far below $300 a share would make sense once it begins.
Netflix Also Hides A Fundamental Weakness
Many will be surprised to know that the biggest streaming company in the world is hardly in great financial shape. While Netflix is profitable on a GAAP net income basis, it was free cash flow positive only in 2020.
That is because its biggest expenditure—the cost of creating new original content—is absent from the company’s income statement. It is only in the cash flow statement, where investors can see that people’s favorite series and movies have cost the company $17.7 billion in 2021 alone.
Subtracting the cost of “additions to content assets” from net income leaves us with under $400 million in operating cash flow. Unfortunately for investors, the company’s capital expenditures of over $500 million eat it all up and then some.
When it is all said and done, Netflix is a money-losing operation, fueling its subscriber growth primarily with debt. The company’s balance sheet shows that its debt load has more than doubled since 2017.
Why were investors willing to pay $700 a share in November for a company that is already huge, but still failing to break even year after year is beyond our ability to understand. Why would anyone pay $370 a share for the same company now? No idea. All we know is to stay aside when fundamental weakness is accompanied by a bearish Elliott Wave pattern.