Top Funds Binge On Netflix Stock. But There’s A Catch.

Like cutting their cable TV subscriptions, top institutional investors shunned all of the Magnificent Seven stocks, including Nvidia (NVDA), Microsoft (MSFT) and Amazon.com (AMZN), in this month’s list of new buys by the best mutual funds. Instead, they devoured shares of Netflix (NFLX), scooping up $682 million worth of the entertainment streaming service. That robust demand has helped propel Netflix stock into a new buy zone. But the breakout comes with a warning label for investors.

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Netflix Back In Growth Mode As Investors Feast

While Nvidia, Microsoft, and entertainment streaming rival Amazon were nowhere to be seen, Netflix topped the list of new buys by best-performing mutual funds. Investors ate up shares of NFLX like two competitive eating champions gorged on hot dogs in Netflix’s Chestnut vs. Kobayashi: Unfinished Beef.

That demand lifted Netflix stock past a 697.49 buy point in a cup pattern at the end of last month.

The new breakout builds on a massive move the TV and movie streaming giant has made since starting to bounce off the low it hit in May of 2022. Netflix stock hit that nadir after a sharp, one-and-a-half-year-long crash precipitated by Wall Street’s concerns about subscriber growth.

But investors pulled out the popcorn as the stock started popping from the second half of 2022. As the company returned to growth mode, Netflix stock soared 337% from that 2022 low until hitting yet another 52-week high last month.

A return to growth has fueled that move. Over the past three quarters, Netflix has posted average earnings growth of 597%. In Q2, the company posted a 48% year-over-year earnings increase to $4.88 per share. Sales rose 17% to $9.6 billion.

For the full year, analysts expect Netflix earnings to rise 59% to $19.10 per share.

Netflix Stock Teases New Breakout — With A Caveat

While rising 337% since May of 2002, Netflix stock formed multiple bases. And that brings into focus an important factor when determining how to buy stocks and when to sell stocks.

As Netflix stock stands poised to retake the all-time high it hit back in November of 2021, investors should consider this key aspect of reading stock charts: learning how to count bases.

Simply put, a base count gets reset when the low of the current base undercuts the low of the prior pattern. While Netflix stock has seen its share of choppiness, it has not reset its count since breaking out of a first-stage consolidation in October of 2022.

Early stage bases have the best prospects of generating big gains. Later-stage patterns entail more risk simply because, by definition, the stock has already made a significant climb.

The new base for Netflix stock is late-stage. Given its sales and earnings growth trajectory, Netflix could certainly keep rising. But investors should keep in mind the added risk this new later-stage pattern brings, especially for those looking to initiate a new position.

On Tuesday, Netflix stock returned to buy range, retaking the initial 697.49 entry it cleared on Aug. 20. After slipping on Wednesday, it continues to hover right around that buy point as it finds support at its 21-day exponential moving average.

Follow Matthew Galgani on X (formerly Twitter) at @IBD_MGalgani.

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