Why Netflix Could Be Poised For A Big Rally

Sep.27.11 | About: Netflix, Inc. (NFLX)

Netflix (NASDAQ:NFLX) stock has plunged in recent weeks due to a consumer backlash over new pricing policies and the end of licensing agreement negotiations with Starz. I had been bearish on Netflix when it was trading at much higher levels, but the stock looks oversold now and could be poised for a rebound. The PE ratio is much more reasonable now and the relative strength index is about 18, which indicates the stock is deeply oversold and possibly set to rebound. For some investors this could be an opportunity to buy for a short-term rebound, and for others with more patience the gains could be much larger. Since Netflix is heavily shorted, a rebound could be fueled even further by short covering.

One analyst at JP Morgan has a $205 price target on Netflix shares. A recent article in Barrons.com details the outlook this analyst has for Netflix and states:

"For patient investors, he sees a brighter future: “We think that Netflix can return to solid subscriber and EPS growth over time as: 1) the streaming only service represented ~75% of gross adds in 2Q and we expect this number to increase; 2) the streaming only product and price remain unchanged since the streaming/DVD split was announced; 3) we continue to believe the 3Q reduction in subscriber guidance was due to churn rather than weakness in gross adds as 80% of the miss was in DVD only. Over time we expect Netflix to become more profitable as Qwikster is run more for profit than growth while streaming subscriber growth continues."

Netflix, Inc. shares are trading around $129.36. Netflix is a leading Internet site for movie rentals. The 50-day moving average is $226.25 and the 200-day moving average is $227.05. Earnings estimates for NFLX are $4.49 per share in 2011, and $6.63 in 2012. The 52 week range is $125.02 to $304.79. With this stock trading for less than 50% of the 52 week high, it could be primed to rebound. As with any stock that is declining, it makes sense to buy in over time so you can take advantage of any further dips.

The data is sourced from Yahoo Finance and Stockcharts.com. The information and data is believed to be accurate, but no guarantees or representations are made. Rougemont is not a registered investment advisor and does not provide specific investment advice. The information contained herein is for informational purposes.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in NFLX over the next 72 hours.