Tune in to Netflix

11/06/2014 7:00 am EST

Focus: STOCKS

Nicholas Vardy

Editor, Bull Market Alert, The Alpha Investor Letter, and The Global Guru

In just one day, the shares of this leading Internet TV provider, plunged as much as 27% when it announced it signed up fewer subscribers than forecast for the quarter, explains Nicholas Vardy, editor of Triple Digit Trader.

Netflix (NFLX) blamed a $1 price hike, raising its subscription cost to $8.99 a month, for discouraging new sign-ups in the United States.

If you’ve followed Netflix stock in the past, it was, as Yogi Berra put it, “Déjà vu all over again.”

The stock tanked 24% in the week after the company raised prices in September 2011. It collapsed 28% in July 2012, as analysts slashed price targets after the company’s second-quarter results.

Here’s why I think the stock is set to repeat this pattern and is due for a big bounce before the year’s end.

First, Netflix’s business model is disrupting the cable industry as more and more consumers are “cutting the cable” megatrend. A single quarter’s result does nothing to change this.

Second, the company now operates in nearly 50 countries and two-thirds of its new subscribers live outside of the United States. I am one of them in the United Kingdom. Its global business is booming and the company is becoming less reliant on the United States.

Third, Netflix—already the world’s largest video-streaming service—is transforming into a full-fledged media company. It has invested in original series such as House of Cards and Orange is the New Black to compete with rivals such as HBO and has also recently announced a push into original movies.

The bottom line? It was a combination of the subscriber forecast miss, HBO’s announcement that it will offer a streaming service the same day and overall stock market weakness that sparked the selloff in the shares.

Netflix has bounced back from disappointing quarters in the past. It will do so again this time. For all the hoopla surrounding subscriber numbers, the company actually beat earnings estimates last quarter.

Net income rose to $59.3 million, or 96 cents per share, from $31.8 million, or 52 cents per share, in the year-ago period.

Revenue rose about 28% to $1.41 billion. That beat expectations of 93 cents per share on revenue of $1.41 billion.

Technically, the stock is hitting a buy signal, based on the longer-term MACD indicator. Market sentiment remains negative, which is bullish from a contrarian perspective.

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