Why Netflix Stock Is Tanking

Netflix stockNetflix stock has tanked 6.18% over the last five days, even despite a 1% gain to $114.78 this morning (Wednesday). While some investors have freaked out about the swift drop in the Netflix stock price, we aren't hitting the panic button.

In fact, we view the decline as a buying opportunity for Netflix stock.

Before we get into our bullish outlook for Netflix Inc. (Nasdaq: NFLX), here's a look at what has been weighing on the Netflix stock price.

Why Netflix Is Down Despite Strong Growth

Since Republican candidate Donald Trump's presidential victory on Nov. 8, tech stocks have gotten crushed. In the four days following Trump's win, the tech sector endured its worst performance since the start of the current bull market that began roughly seven years ago.

Before the election, tech stocks in the S&P 500 Index were up 11% year to date. Since the election, they have shed 1.8%. Tech stocks (the largest group in the S&P 500 Index) dropped 3.1% over those four days. At the same time, the index climbed 4.2%.

Bearish option activity tracking S&P 500 tech stocks has also picked up. The number of puts on the Technology Select Sector SPDR Fund (NYSE Arca: XLF) that traded Monday was the highest in at least five years, according to Trade Alert data.

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The key concern among investors is that Trump's contentious trade and immigration policies will mean lower earnings for these multinational tech firms.

Plus, immigration is a big component in how tech companies attract and hold talent.

Investors have also been turning to the infrastructure and financial industries in the wake of the election. That could mean money leaving tech stocks. Trump has pledged to spend $1 trillion on infrastructure. And interest rates are expected to rise over the next several months, which will help banks.

There are also worries about Trump's opposition to AT&T Inc.'s (NYSE: T) deal to buy Time Warner Inc. (NYSE: TWX) and how it will impact the media space. Trump said that mergers like Comcast Corp.'s (Nasdaq: CMCSA) with NBCUniversal "destroy democracy."

But Trump has also criticized regulations that he believes don't result in concrete economic benefits.

That could make him receptive to arguments from companies that oppose new Federal Communications Commission (FCC) net neutrality rules.

And that would present a key benefit to internet service providers and Netflix...

Netflix Stock Drop Looks Like a Buying Opportunity

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Trump has called net neutrality a "top-down power grab."

With net neutrality, or uncontrolled access, internet service providers can't vary the download speed of specific websites or demand higher payment from high-traffic, high-bandwidth content sites. That's positive for Netflix.

Without net neutrality, internet service providers are free to control the amount of bandwidth allowed to content providers. That would pressure Netflix.

Netflix has continued to grow under the new net neutrality rules. A reversal of the rules would bode ill for the streaming media giant and limit subscribers to the site.

The Netflix stock price is deeply influenced by how much its subscriber count grows each quarter. Figures from its latest quarter show Netflix's subscriber growth continues to be strong. Shares rose 19% after the Q3 report.

  • Netflix ended Q3 2016 with 47.5 million domestic subscribers. That was an addition of 370,000. International count was up 3.2 million to 39.25 million.
  • In the first nine months of 2016, Netflix added 12 million global members.
  • For Q4, Netflix is forecasting 5.2 million global net adds. Roughly 1.45 million net adds are expected domestically, and 3.75 million new members are expected internationally.

Netflix continues to attract and retain members with original content, strategic alliances, and stellar service. Additionally, some of Trump's promised policies, like allowing companies to repatriate cash, could help Netflix. It could create more business spending and spur more mergers and acquisitions.

So you see, the sharp sell-off in Netflix stock and the overall space is an overreaction. The industry is poised to benefit from a rising economy, which many expect under Trump.

Money Morning remains bullish on the stock long term. Wall Street shares a similar sentiment. The consensus analyst rating on Netflix stock is "Overweight" with a $122.64 price target.

At $114.63, NFLX stock is flat year to date. But three- and five-year gains are 130% and 887%, respectively.

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