Logo On Building

Source: Netflix.

Netflix (NASDAQ:NFLX) shares fell 7.8% on Thursday as part of a broader market selloff. The digital media stock then tumbled another 7.6% on Friday, dropping back to prices not seen since before the blowout second-quarter report in July.

Netflix shares ended the week below $104 per share. That's a nearly 20% discount from the all-time high reached on August 6.

Is it time to sell Netflix and run for the hills -- or to take advantage of this discount to build your Netflix position instead?

What's wrong?
You know the mythical old adage: "Buy when there's blood in the streets."

Whether you attribute that phrase to John D. Rockefeller or the Rothschild banking clan, the maxim makes sense. If you want to buy low and sell high, why wouldn't you get your wallet and checkbook ready when your favorite stocks suddenly show up in the bargain bin?

The corollary to this, of course, is also very simple: "The bigger they are, the harder they fall."

Before this pullback started, Netflix stock had doubled in just 12 months. Its three-year return stood at an incredible 1,500%. Critics often call Netflix a "momentum stock," always with an implied sneer at the low quality of these high-flying disasters. Like Icarus, momentum stocks are assumed to trade on hot air and empty promises, devoid of fundamental business strength and real value-driving news. In this view, Netflix may have flown too close to the sun and started a massive correction.

Wedbush Securities analyst Michael Pachter, for instance, recently set his Netflix target price at $40 per share. His valuation is based strictly on trailing earnings and modest P/E multiples. If the market quickly adopts that conservative view, Netflix could fall another 60% or more, even from this discounted starting price.

If you agree with this point of view, then it's definitely time to sell the stock or maybe even short it. In fact, short-selling might very well be your only bearish option (short of trading options, of course). If you share Pachter's view on Netflix, I'd be shocked to see you actually owning shares in the first place.

Why? Well, that leads us right into...

No news is bad news?
You see, Netflix has suddenly plunged 16% lower on no negative news at all.

None. Zero. Zilch.

I'd understand if you were holding Netflix, and then changed your mind in the face of terrible news or management blunders. Many Netflix investors lost all hope in 2011, for example, when CEO Reed Hastings split the DVD and streaming services in a very clumsy way.

Hastings would have loved to have spent the next couple of years making the most of his new operating structure. Instead, he had to retrench and take a much less aggressive approach. 2012 to 2014 were spent "rebuilding the brand," and Hastings saw himself as "on probation" during this period.

But that's not at all what's happening today. The best explanation for this quick selling action is profit-taking. The stock has run far and fast, and there's nothing wrong with taking some chips off the table -- especially if you're nervous about the state of the global economy again.

But other than that, there's not much to report.

The British press caught Netflix shooting some scenes for its upcoming drama series about Queen Elizabeth II, reminding us all that the company is spending roughly $160 million to create the 60-episode series. But that's only a reminder -- no fresh news. And on the upside, you could easily argue that Netflix wouldn't spend that kind of money on a dead-end project. Netflix originals have delivered more hits than flops, after all. Why expect disaster for this particular title, which comes with a heaping side of pop-culture relevance?

Devices

Source: Netflix.

You might argue that Netflix was caught in the general sell-off on entertainment stocks on Thursday. Walt Disney plunged 6% lower and Time Warner shares fell 5%. That sectorwide plunge was triggered by an ice-cold research note from analysts at Sanford Bernstein, who argued that the media market has changed. In Bernstein's view, cable TV content and broadcasting aren't the cash cows they used to be, thanks to the rise of cord-cutting.

But, of course, Netflix is not a likely victim of that game-changing movement. The cord-cutting argument is great ammunition for lower ratings on old-media firms, who stand to lose big unless they can adapt to the cord-cutting megatrend.

Netflix, on the other hand, pretty much created the cord-cutting phenomenon. If anything, Bernstein's note should be seen as very good news for Netflix investors -- a reason to buy rather than sell.

The only real negative in the Netflix news feeds right now is criticism of its celebrated parental leave policy, which doesn't apply to the low-wage workers in DVD sorting and customer service who arguably need it most. This is a real issue, but stocks rarely drop on cost-saving nuances like this one. Moreover, it's a negative angle on a largely positive policy change, making that argument look nitpicky at best.

Long story short
So let's summarize the story so far:

  • Netflix shares have fallen 15% in less than 48 hours on no bad news of note.
  • The stock has backed down 20% from its all-time high, setting up a tempting discount for the bulls among us.
  • Old bears probably sold their Netflix shares long ago.
  • Newly converted bears, if they even exist, would have to play short-sale chicken with the bulls at this point.

I see no reason at all to sell Netflix shares today. Even if you're unimpressed by the company's global growth and solid content production, shorting Netflix stock here would be an extremely risky move with limited upside.

Buy, hold, or stay on the sidelines, according to your general view of the Netflix model. Just keep that 20% discount in mind, along with "buy low, sell high" and "blood in the streets."

Anders Bylund and The Motley Fool own shares of -- and The Motley Fool recommends -- Netflix and Walt Disney. Try any of our Foolish newsletter services free for 30 days.

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