Netflix CEO Admits That It's a Momentum Stock -- Should You Sell at This Top?

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Forget the one-month trial. This Fool is sticking with Netflix for the long haul.

Netflix (NASDAQ: NFLX  ) stock has been very good to me. One of my buy-in cohorts has doubled in value and the other more than quadrupled. I see many years of continued growth ahead, maybe even decades. The Netflix story is working out almost exactly how I've envisioned it since mid-2006. And last night, Netflix reported another stellar quarter. CEO Reed Hastings even gave me one more very Foolish reason to love him, his company, and the stock. Specifically, Hastings noted that Netflix stock gains are at least partly powered by "momentum-investor-fueled euphoria, and that "we do our best to ignore the volatility in our stock."

And the CEO's moment of shareholder-friendly candor is making me think very hard about selling some Netflix shares this week.

What's going on?
Sounds backward in more ways than one, right?

  • The CEO of a major public company backs down from the typical cheerleader spin to point out that share prices might not be based on fundamentals right now.

  • This kind of candor is one of the strongest "buy" signals for any stock. It's more important to have good people at the top than to meet arbitrary targets. Honesty matters.

  • Yet, this investor-friendly disclosure makes a longtime Netflix investor and supporter think twice about his holdings.

Let me explain. I'm not considering the end of my Netflix investment at all. It's just a matter of portfolio management, and Reed Hastings gave me a reason to take some Netflix profits right about now.

Thanks to the run-up in 2013, Netflix is my largest holding by far. This one stock now accounts for roughly one quarter of my retirement portfolio. Scaling back this position would free up capital for other investments, and also reduce the risk of Netflix volatility swinging the other way.

And you heard Hastings: Netflix shares are extremely volatile and the current prices may indeed be unsustainable in the short term. The stock will probably crash hard at some point, like it did when the premature Qwikster idea was presented with a side of butterfingers, or when Blockbuster bet the company on attacking Netflix's core business in 2004.

The stock will swing, probably pretty wildly. Am I not inviting disaster by holding on to Netflix shares at historical highs?

Should I stay or should I go?
In the final analysis, I think I'll stay put after all. Timing the market is a sucker's game. So what if Netflix shares drop again due to another boneheaded mistake or perhaps some unexpected competition? The company has seen these so-called disasters before and always came back stronger.

In the long run, I'm still convinced that Netflix will continue to grow. Hastings is still in a building phase, particularly overseas. Latin America alone is poised to become as important as the domestic streaming market. Netflix has barely started to explore Europe, and highly connected cultures like Japan and South Korea (combined population: nearly 180 million) aren't even on the Netflix roadmap.

Yet.

So I think I'll let my biggest winner win. I'm a Netflix investor for the long haul, none of my shares are tied to option contracts with expiration dates to worry about or risky margin trades, and I'm just likely to pick up more shares on the next stock-crushing hiccup.

Fellow Fool Morgan Housel says we should invest like psychopaths, taking emotion out of the analysis. Short-term swings don't really matter in the long run. Well, Reed Hastings takes the same approach -- and so do I. Thought about it, but I'm not selling Netflix here.

This town ain't big enough for the two of us... or is it?
Netflix sure has some spirited competition, but the market they exploit is fantastically healthy. Americans reportedly spend nearly 34 hours a week watching television! With television viewing taking up almost as much time as the average work week, the potential for profits in the space is enormous. The Motley Fool's top experts have created a new free report titled "Will Netflix Own the Future of Television?" The report not only outlines where the future of television is heading, but offers top ideas for how to profit. To get your free report, just click here!


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