Why Netflix Stock Dropped 5% Today

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What happened

Shares of Netflix (NASDAQ:NFLX) — among the hottest performers on the Nasdaq, with an 87% gain over the past 52 weeks — are giving back some of those profits today. As of 1:30 p.m. EDT, Netflix shares are down 5%.

The question is why?

Man peeking between fingers to watch screen.

Is Netflix stock still going down? I can’t bear to look. Image source: Getty Images.

So what

We can rule out all of the usual suspects. Netflix didn’t report any disappointing earnings news today. It didn’t warn of bad news to come or make any noises about subscriber growth slowing down. No analysts downgraded Netflix stock — or even cut their price targets.

Rather, Netflix shares appear to have been caught up in a stock market rout that has the Nasdaq as a whole trading down nearly 2% today (and the Dow trading down more than 1%). Perversely, analysts blame a strong economy for this, because a strong economy pushes bond prices up — making “risky” stocks relatively less attractive than “safer” bonds.

Now what

And let’s get real here: There aren’t a lot of stocks as obviously “risky” as Netflix, with its 150-plus price-to-earnings ratio and its total lack of free cash flow. (Despite reporting steadily rising “net income,” Netflix hasn’t generated a penny’s worth of cash profit in the past five years, according to data from S&P Global Market Intelligence.)

With Netflix continuing to rise in price despite the odds and profits apparently rising as well, investors haven’t spent too much time worrying about cash generation so far. Now that interest rates are rising, though, and bonds are looking relatively better, some might be having second thoughts about investing in a stock so very richly valued.

They might be deciding that in the case of Netflix, discretion is the better part of value investing.

Rich Smith has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Netflix. The Motley Fool has a disclosure policy.

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