Investors turned on Netflix Inc on Tuesday, reversing early gains in a flurry of selling that bore the hallmark of momentum traders getting out of the high-flying stock.
After rising nearly 10 percent at the open, Netflix, this year's best performer on the S&P 500, was met with immediate selling that picked up once shares moved into negative territory on the day. Volume spiked as shares fell, a sign of hot money leaving the stock.
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"Being such a big momentum trader-oriented name, I think people were very quick to capitalize on the pullback from the morning's highs," said Michael James, managing director of equity trading at Wedbush Securities in Los Angeles.
Netflix dropped $21.19, or 6 percent to $333.80 on more than 17 million shares, several times the stock's 50-day average volume. It peaked at $389.16 on the day,
Coming into the day, Netflix shares were up 282 percent on the year and had surprised investors after reporting stronger-than-expected profits and subscriber growth on Monday evening.
However, the gains this year have led many analysts to say that the stock is vastly overvalued, with a price-to-earnings ratio of 113 that dwarfs the 16.44 ratio of its industry peers.
Last week, the stock jumped 11 percent ahead of the earnings.
While more than a dozen brokerages raised their price targets on the stock in the wake of results, many of the targets remain below Netflix's current share price, a sign that even accelerated growth may not be enough to justify the company's nearly $21 billion market cap.
In a letter to shareholders released in conjunction with the results late Monday, chief executive Reed Hastings and CFO David Wells downplayed some of the recent share gains, calling them reminiscent of similar surges in 2003, which preceded a sharp pullback. At that time, "we had solid results compounded by momentum-investor-fueled euphoria," they wrote.
"I'm really surprised by this reversal, but it seems like people are really piling onto what Hastings said last night about euphoria fading," said Todd Schoenberger, managing partner at LandColt Capital in New York.
The selling in Netflix spread to other big winners this year, including Tesla Motors Inc, Salesforce.com, and Priceline.com, all of which were lower on the day.
"Once (Netflix) started weakening, you started seeing other momentum names with high betas that have been big winners this year and recently all started coming under significant pressure," said James, referring to stocks that are generally more volatile than the rest of the market.
In the options market, trading volume on Netflix was more than three times the daily average, according to options analytic firm Trade Alert. (Additional reporting by Doris Frankel and Caroline Valetkevitch; Editing by Nick Zieminski and Leslie Gevirtz)