Why Netflix's Initial Selloff Was 'Correct'

• Shares of Netflix, Inc. NFLX initially fell more than 14 percent following its third quarter results.
• Investors and traders initially sold the stock following a top and bottom line miss and concerning subscriber growth figures.
• The Tech Stock Strategist's Sean Udall noted that the initial reaction was "correct."

Shares of Netflix initially plummeted more than 14 percent during Wednesday's after hours trading session following the release of the company's third quarter results. Netflix earned $0.07 in the quarter, a penny less than analysts were expecting. Revenue of $1.74 billion also fell short of what analysts were expecting by $10 million. Investors and traders also reacted to Netflix's subscriber additions. Specifically, the company added 0.88 million new US members in the quarter – a figure that fell short of the 0.98 million it added in the same quarter a year ago. Sean Udall, a technology stock strategist, commented that Netflix's print was "messy" and that the initial stock reaction was "correct." Udall noted that the only lever left for Netflix to pull is a price hike and it's possible that the company can't raise its prices as much as bulls may think. He further noted that the only way for Netflix to keep its stock price "ship going" is to grow its subscriber base. Putting the two together, Udall pointed out that many valuation models are based on subscriber dependent ARPU (average revenue per user) methodologies. BZ Note: In other words, It is possible that if these ARPU models break down, the stock could break down as well.