How Good Is Netflix’s Stock At Rebounding From Large Drops?

by Trefis Team
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Netflix
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Netflix stock has seen a fair amount of volatility over the last few months on account of mounting competition from the likes of Disney+ as well as due to weaker-than-expected U.S. subscriber figures. So how resilient is the stock to large swings? Specifically, if Netflix sees a single day drop of 3% or more, what are the chances it’ll spring back within a week? What about a steeper drop of say -5%?

Based on the Trefis AI engine there is a pretty meaningful chance (of over 10%) that Netflix stock could see a single-day drop of 3% or more. Thankfully, this is countered by a solid 36% chance that the stock will bounce back from such a drop in the subsequent week. Take this to the next extreme of 5% or greater single-day drop, and the chances that Netflix will bounce back in the subsequent week are still pretty strong 33%.

Try out the Trefis Machine Learning Engine to test the chances of a rebound or a drop after fall for Netflix stock. You can test the chance of recovery over different time intervals of a quarter, month, or even just 1 day!

 

Below, we also discuss a few scenarios and answer common investor questions:

Question 1: Does a rise in Netflix stock become more likely after a drop?

Answer:

Consider two situations,

Case 1: Netflix stock drops by 5% or more in a week

Case 2: Netflix stock rises by 5% or more in a week

Is the chance of say a 5% rise in Netflix stock over the subsequent month after Case 1 or Case 2 occurs much higher for one versus the other? Interestingly, for Netflix, the chances of a 5% rise over the next month (21 trading days) is about 47% for Case 1, i.e. when Netflix’s stock has just suffered a loss, versus about 50% for Case 2, when the stock has seen a gain over the last week.

 

Question 2: What about the other way around, does a drop in Netflix stock become more likely after a rise?

Answer:

Consider, once again, two cases

Case 1: Netflix stock drops by 5% in a week

Case 2: Netflix stock rises by 5% in a week

The chance of a 5% drop after Case 1 is about 27%, versus about 26% for Case 2. For comparison, for the S&P 500 and for many other stocks, it turns out the chances of a 5% drop after Case 1 or Case 2 has occurred are also quite similar. View our Machine Learning Analysis of the S&P 500

 

Question 3: Does patience pay?

Answer:

If you buy and hold Netflix stock, the expectation is over time the near term fluctuations will cancel out, and the long-term positive trend will favor you – at least if the company is otherwise strong.

Overall, according to data and Trefis machine learning engine’s calculations, patience absolutely pays for most stocks!

For after a drop of 5% in Netflix stock over a week (5 trading days), while there is only about 26% chance the stock will gain 5% over the subsequent week, there is more than 58% chance this will happen in 3 months, and 66% chance it’ll gain 5% over a year (about 252 trading days).

The table below shows the trend for Netflix stock:

 

Question 4: What about the possibility of a drop after a rise if you wait for a while?

Answer:

There are two opposing forces at work on Netflix stock here. First, is the general positive bias for Netflix stock (and for most other stocks) – that pulls the stock upwards with time. Second, the basic chance of a drop, as a chance of any event happening, should simply increase with the passage of time.

After seeing a rise of 5% over 5 days, the chances of a 5% drop in Netflix stock are about 18% over the subsequent 5 days of waiting and stands at about 26% when the waiting period is a month (21 trading days). However, interestingly, the probability remains flat at about 26% for waiting periods of a quarter and a year as well.

 

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