Investors would have been out of Netflix stock well before Friday's crash if only they had heeded the warning signs. That's why Netflix is the IBD Stock Of The Day, as an example of how to use sell rules to avoid losing your shirt.
In afternoon trading on the stock market today, Netflix stock tumbled 21%, near 401. Late Thursday, the internet television network missed its own target for new subscribers in the fourth quarter and guided much lower than views for the current quarter.
For the current quarter, Netflix forecast adding 2.5 million new subscribers, vs. estimates for 5.8 million. It ended the fourth quarter with 221.8 million subscribers worldwide.
At least nine Wall Street analysts downgraded Netflix stock following the company's fourth-quarter earnings report. Numerous analysts slashed their price targets on NFLX stock, some by $200 or more.
Early Sell Signals For Netflix Stock
Netflix stock has been in a steep decline since late November amid concerns about slowing growth. It hit an all-time high 700.99 on Nov. 17.
Netflix stock presented a clear sell signal on Dec. 1 when it decisively broke below its 10-week moving average line, a key support level. It continued falling over the next two days, wiping out the gains from its Sept. 2 breakout.
If Netflix investors missed that sell sign, the stock presented another on Jan. 6. That's when it fell below its 200-day moving average line, another key support level.
Longtime Netflix bear Michael Pachter, an analyst with Wedbush Securities, said he believes Netflix stock will continue to decline because sentiment has turned negative.
"Netflix investors are just beginning to appreciate Netflix's future status as a low-growth, extremely profitable enterprise," Pachter said in a note to clients. "When they fully appreciate this, we expect Netflix's share price to decline further."
Pachter rates Netflix stock as underperform with a 12-month price target of 342.
Competition Hurting Growth Prospects
Netflix appears to have hit a ceiling on new subscribers in the U.S. and Canada, Pachter said. Its future subscriber growth will occur primarily in less-developed regions, mostly in the Asia Pacific and Latin America. And those markets command much lower subscription prices, he said.
Macquarie Capital analyst Tim Nollen downgraded Netflix stock to underperform from neutral. He lowered his target price to 395 from 615.
On its earnings call, Netflix management acknowledged that competition is weighing on its growth prospects. Rivals include Walt Disney's Disney+ and Hulu, AT&T's HBO Max and ViacomCBS-owned Paramount+. There's also Comcast's Peacock and Amazon.com's Amazon Prime streaming service.
"Competition is intensifying, especially internationally," Nollen said in a note to clients. "This is becoming a bigger problem now."
Netflix Stock Tops In Low-Rated Group
Netflix stock has a middling IBD Composite Rating of 66 out of 99. IBD's Composite Rating combines five separate proprietary ratings into one easy-to-use rating. The best growth stocks have a Composite Rating of 90 or better.
Netflix stock is tied for first place with Avid Technology among 23 stocks in IBD's Leisure-Movies & Related industry group, according to the IBD Stock Checkup tool. But that group ranks No. 166 out of 197 industry groups that IBD tracks. IBD trading guidelines recommend focusing on top-rated stocks in leading industry groups.
Follow Patrick Seitz on Twitter at @IBD_PSeitz for more stories on consumer technology, software and semiconductor stocks.
