Why Netflix (NFLX) Reversed Its Overnight Gains

Updated from 5:08 p.m. EDT to disclose Carl Icahn's updated position on Netflix in second paragraph. 

NEW YORK (TheStreet) -- Netflix (NFLX) CEO Reed Hastings warned against "momentum investor-fueled euphoria" in the company's third-quarter shareholder letter and investors took note. High-momentum stocks slipped to close lower on Tuesday but none so far as Netflix, which only 6 hours earlier was soaring to record heights on solid third-quarter earnings.

And the day went from bad to worse as billionaire investor Carl Icahn disclosed he unloaded 2.4 million shares, cutting his stake in the company to 4.52% from the 10% in his portfolio a year earlier. In an SEC filing, the reason given for Icahn partial exit of his investment was "in view of the 457% increase in the price of those shares since the original investment".

In after-hours trading, shares slumped 2.2% to $315.50. Shares of the streaming service tumbled 9.2% to $322.52, shedding $65.32 since market open. During the day, 25.51 million shares changed hands, seven times the stock's average three-month daily volume of 3.5 million.

Investors were taking their profits, despite third-quarter earnings of 52 cents a share that beat analyst expectations by three cents in a Thomson Reuters survey. Netflix said it ended the quarter with more than 40 million members, up from less than 30 million a year earlier.

A possible contribution to fears was the degree to which the 1.4 million new international members were the result of "low quality free trials" in Latin America and how this could affect long-term member totals and profitability. The international unit lost $74 million in the quarter, compared to $92 million in the year-ago quarter. The Los Gatos, Calif.-based company anticipates a loss of $65 million in the fourth quarter.

Separately, CEO Reed Hastings said in a conference call that Netflix was still uninterested in hosting sports content, quashing rumors of a partnership with the NFL. "All [our] attributes are on-demand and I don't think that brings much to sports viewing which is primarily a linear experience," he said.

In ratings, Jefferies reiterated its "underperform" rating, pointing to "the risks of rising content costs, heavy competition, and the likelihood Netflix may need to raise additional capital to fund operations" to explain its bearish outlook.

Cantor Fitzgerald kept its "hold" rating with a price target of $350 as "current valuation keeps us on the sidelines", while Oppenheimer raised its price target to $434 from $259 and maintained a "perform" rating on valuation concerns.

'"It looks like there is a wholesale onslaught on everything that's going up endlessly," warns Jim Cramer in his recent Real Money analysis. "This is day one and we know reversals last several days." 

TheStreet Ratings team rates Netflix Inc as a Hold with a ratings score of C. TheStreet Ratings Team has this to say about its recommendation:

"We rate Netflix Inc (NFLX) a HOLD. The primary factors that have impacted our rating are mixed -- some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. The company's strengths can be seen in multiple areas, such as its revenue growth, expanding profit margins and good cash flow from operations. However, as a counter to these strengths, we also find weaknesses including disappointing return on equity, premium valuation and generally higher debt management risk."

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