Shares of streaming giant Netflix Inc. (NASDAQ: NFLX) have entered rare territory.
After the recent sharp selloff, which wiped 12% off the stock in just a few sessions, the stock closed out Oct. 27 with the lowest Relative Strength Index (RSI) of any mega-cap name, sitting at just 33. For a company of its size, that’s a fairly extreme reading, and one that often precedes a rebound.
Despite the oversold conditions, we could be looking at one of the best rebound plays of the quarter right now. The company’s recent Q3 earnings report was, on the surface, disappointing. Netflix missed its earnings-per-share (EPS) target by $1.01, and saw investors rush to exit from what had already been a range-bound stock since before the summer.
But when a stock drops that hard, with an RSI that low, it can often mean the pendulum has swung too far to the downside, especially when there are still several reasons to be bullish.
The Selloff That Created the Setup
To be sure, Netflix’s post-earnings decline wasn’t entirely without reason. Heading into the report, expectations were high, and its valuation was elevated compared to recent quarters. The stock’s price-to-earnings (P/E) ratio had crept higher, leaving little room for anything short of perfection. When that didn’t materialize, some kind of selloff was to be expected.
However, RSI readings like this can create an opportunity. Readings below 30 indicate oversold conditions and can signal that a stock is due for a bounce. At 33, Netflix isn’t quite there, but it’s close. And as we’ve highlighted recently, RSI can be a great way to find diamonds in the rough and identify stocks on the cusp of recovery.
What the Bears Missed in the Report
The headline EPS miss overshadowed several positives buried in the report. Most notably, Netflix had its best ad sales quarter ever, driven by new markets and improving engagement. That’s not the language of a company in decline.
Netflix also emphasized the expansion of its global content pipeline and advancements in ad-tech capabilities. These are long-term growth levers that will support higher margins and more diversified revenue streams. While bears focus on the earnings shortfall, bulls argue that Netflix is laying the groundwork for accelerating growth into next year and beyond.
It’s also worth remembering that Netflix has been through similar cycles before. Steep selloffs have often preceded major recoveries, especially when they’ve coincided with deeply oversold RSI readings—just like in January of this year. With fundamentals intact, this latest correction may simply be setting the stage for another one.
Analysts Are Staying Bullish
It’s also worth noting that Wall Street isn’t turning its back on Netflix. In fact, several top analysts have used this drop to reaffirm their bullish stance. Guggenheim, Piper Sandler, Jefferies, and Canaccord Genuity all reiterated Buy or equivalent ratings in the aftermath of last week’s report, citing strong long-term fundamentals and a clear growth path through advertising.
Canaccord’s $1,525 price target is the standout. From where the stock was trading on the morning of Oct. 28, that’s a targeted upside of some 35%. Even the more conservative targets from Guggenheim and Jefferies imply meaningful gains. With most of Netflix’s mega-cap peers already at or near record highs, few offer this kind of asymmetric potential.
The Case for a Rebound
Technically, Netflix already looks like it’s starting to stabilize. After hitting a post-earnings low on Oct. 27, then closing well above it, shares have continued to be bought up into Oct. 28. If the bears are going to turn this selloff into a downtrend, they'd better act fast. Because otherwise it’s looking like the bulls are already starting to wrest control away from them and get the recovery underway.
The RSI remains on the verge of being extremely oversold but is turning upward, often an early sign that momentum may be shifting back toward buyers. If shares can stay above $1,100 through this week, it would indicate that there’s a broad band of buyers who won’t let the stock go lower—and that’s often how the best rebounds start.
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The article "This Mega-Cap Stock Has the Lowest RSI—and the Most Upside" first appeared on MarketBeat.
