Entertainment Stock Offers A Rare and Tempting Entry Opportunity

Key Points

• Netflix shares have been rallying hard all year.
• Last week's earnings report will have laid the foundation for further gains into 2025. 
• But a general softening across equities has opened up an entry opportunity that won't be around for long. 

Despite having been one of the core members of the once famous FAANG group of tech stocks, Netflix Inc NASDAQ: NFLX holds the dubious honor of also being the one that fell the hardest from its 2021 peak. A red-hot rally, fuelled by pandemic-era lockdowns, turned to dust in 2022 as the streaming giant struggled to meet investor expectations. An 80% drop from peak to trough tells its own story, and you'll be hard-pressed to find a recent article that talks about the FAANG group in the present tense. 

However, investors will ignore Netflix at their peril. Sure, looking at performance since February 2020, it has the lowest returns of all the FAANG group with just 90%. For context, Meta Inc NASDAQ: META is up 120% in that timeframe, while Apple Inc NASDAQ: AAPL is up 185%. But for those of us who avoided being washed out during the post-pandemic plunge, there are several reasons to be excited about Netflix right now. 

Solid Recovery: Netflix's Impressive Rebound

In the two years since the stock bottomed out in May 2022, Netflix has returned 265%. Since the start of this year alone, it's up 33% and has all but recovered its losses. Only earlier this month did Netflix's shares come within a few dollars of topping 2021's all-time high of $701. It's been a stunning recovery, and it feels like there's a lot more to come. 

Last week's Q2 earnings report will have done a lot to set the foundation for the next rally phase, which is surely on track to take the stock to record prices. Netflix beat analyst expectations on both earnings and revenue, with operating margins jumping from 22% to 27% year on year. The company's forward guidance for full-year 2024 revenue growth also came in hot, with it now expected to land somewhere between 14-15%. Their acquisition numbers were strong, as was retention, both of which went a long way to justifying the ongoing rally. 

Analysts Predict Further Upside for Netflix Shares

Based on the report, the team at UBS Group didn't hesitate to reiterate their Buy rating on Netflix shares while boosting their price target to $750. From Tuesday night's closing price of $643, that's pointing to an additional upside of some 16%. Analyst John Hodulik was impressed by the company's increasing edge on competition, while the focus on widening margins also caught his eye. 

Redburn Atlantic took a similar stance, although with a fresh price target of $760. Similarly to UBS Group, analyst Hamilton Faber zeroed in on Netflix's strong forward guidance and increasing momentum on the acquisition front. 

Appealing Technical Setup for Netflix Investors

Beyond the strong bullish outlook of these analysts who are calling for record highs in the near term, interested investors also have an appealing technical setup on their side. The Relative Strength Index (RSI) of a stock is a popular measure to assess how overbought or oversold a stock might be. It considers a stock's recent trading history, usually the previous 14 days, and then spits out a number between 0 and 100. Anything under 30 puts it in the oversold camp, while anything over 70 suggests it's overbought.

Netflix was straying into the latter category just last month, which can make a stock unattractive to many investors as there's the risk of a pullback. However, with equities in general after softening in the past week, Netflix has also been dragged down a little. This has brought its RSI down below 40, which, considering the bullish outlook on the stock for the second half of the year, lends itself to the feeling that there's a serious bargain to be had right now.