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Stock Market Wrap-Up: Why the Latest Netflix Panic Is Ridiculous

By Dan Caplinger – May 22, 2020 at 4:51PM

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The video streaming company's losing streak is immaterial compared to its long-term prospects.

Friday brought a quiet end to the week for the stock market, as investors went into the Memorial Day holiday weekend with a balanced view on what the future could bring. Many are still impressed with how well many companies have held up during the coronavirus-driven closures of much of the global economy, while others fear that attempts to reopen stores and businesses could backfire and eventually lead to longer renewed disruptions. The Dow Jones Industrial Average (^DJI -0.43%) finished with a modest loss, but the S&P 500 (^GSPC -0.21%) and Nasdaq Composite (^IXIC 0.25%) finished in the black for the day.

Today's stock market


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Data source: Yahoo! Finance.

Throughout the current crisis, investors have focused on video streaming giant Netflix (NFLX 0.13%). Recently, Netflix followers have been concerned about the stock's pullback during what was otherwise a good week for the market, with Friday's drop marking the fifth day in a row that Netflix shares lost ground. One analyst sees the recent pullback as just the beginning of a huge move downward, but others remain optimistic that Netflix is on the cutting edge of the trend away from traditional home television viewing and toward on-demand streaming. Regardless of your long-term views on the stock, though, the idea that Netflix's streak of modest daily declines is somehow meaningful simply doesn't make any real sense.

The bull case for Netflix

Netflix has gotten a lot of attention because its customers are relying on the video streaming service now more than ever. With so many people stuck at home due to lockdown orders, demand for home entertainment has skyrocketed. As the first mover in the video streaming space, Netflix is the natural beneficiary of that trend.

Netflix logo in red, with tagline below.

Image source: Netflix.

Yet Netflix isn't just looking for customers to pad its financial metrics. This week, it demonstrated its willingness to go beyond simply maximizing profits by deciding proactively to shut down accounts of inactive subscribers who haven't watched any Netflix content over the past year.

At first glance, that seems like an obvious money-losing move. Netflix makes the most money from those who pay subscription fees but don't watch any programming. Yet from a customer service standpoint, recognizing that a customer isn't getting any value from your product and choosing no longer to charge a credit or debit card automatically is a highly positive step that subscribers should applaud.

Why investors are scared about Netflix

That said, Netflix still faces plenty of challenges. Competing video streaming services are popping up left and right, and some have seen a great deal of success. The Disney+ platform from Disney (DIS -2.31%) has already gotten more than 50 million subscribers, and it's lining up exclusive content deals that promise to give Netflix a run for its money.

Yet when viewers give up cable television packages that cost them $100 or more a month, they can afford to subscribe to more than just one service at $5 to $15 per month. Many fear that Disney+ and other services will draw business away from Netflix, but it's just as likely that many subscribers will go with multiple services -- perhaps signing up for Disney+ while still hanging on to their Netflix subscriptions.

Netflix shares lost 1.5% today, bringing their decline for the week to just over 5%. That's not worth worrying about -- especially with the stock still up 33% year to date. Great growth stocks  have down weeks, but you shouldn't panic about their prospects without more evidence.

Dan Caplinger owns shares of Walt Disney. The Motley Fool owns shares of and recommends Netflix and Walt Disney and recommends the following options: long January 2021 $60 calls on Walt Disney and short July 2020 $115 calls on Walt Disney. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Netflix, Inc. Stock Quote
Netflix, Inc.
$224.36 (0.13%) $0.29
Dow Jones Industrial Average (Price Return) Stock Quote
Dow Jones Industrial Average (Price Return)
$29,134.99 (-0.43%) $-125.82
S&P 500 Index - Price Return (USD) Stock Quote
S&P 500 Index - Price Return (USD)
$3,647.29 (-0.21%) $-7.75
The Walt Disney Company Stock Quote
The Walt Disney Company
$95.85 (-2.31%) $-2.27
NASDAQ Composite Index (Price Return) Stock Quote
NASDAQ Composite Index (Price Return)
$10,829.50 (0.25%) $26.58

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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