Netflix Stock Isn’t Perfect (NFLX)

This year, investors have made tidy sums by investing ahead of Netflix, Inc. (NFLX) earnings reports — right up until today.

Netflix Stock Isn't Perfect (NFLX)
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Netflix stock was off more than 8% in early Thursday trading — and that’s relatively encouraging considering shares of NFLX were down as much as 15% in Wednesday’s after-hours trading.

So what went wrong? Well, let’s take a look at Netflix’s most recent results:

Netflix Q3 Earnings

Netflix earned $29.4 million, or 7 cents per share, in Q3, missing Wall Street estimates by a penny. Revenues of $1.74 billion, while up from $1.41 billion in the year-ago period, also disappointed analysts who were looking for sales of $1.75 billion.

The main culprit for the decline in Netflix stock, however, was the mixed picture regarding users.

On the positive side, NFLX saw strength in global markets, with international users growing to 2.74 million, compared to a forecast of 2.45 million.

The U.S. market was another matter.

New additions came to merely 880,000, which was far off Netflix’s own projection of 1.15 million, as well as the Street consensus for 1.25 million. That’s a big miss, so it’s no mystery as to why Netflix stock is so heavily under pressure.

The cause? CEO Reed Hastings blamed the fall-off on a chance in technology in debit and credit cards. Card providers are using new microchip technology to enhance security, but many people who received these new cards didn’t update their accounts in time, causing many regular payments to go awry. Other than that, though, he was vague on this point.

While the chip-card turnover is a legitimate problem, one has to wonder just how much of the shortcoming should really be chalked up to credit cards.

What about the competition?

Amazon (AMZN) Prime. Hulu. Newer offerings from Comcast (CMCSA), 21st Century Fox (FOXA), CBS (CBS), Time Warner (TWX) and Sony (SNE). Consumers have a basket of options to choose from.

And that basket is only getting bigger. Apple (AAPL) is making a play for the market. Google (GOOG, GOOGL) is increasingly pushing the pedal down on YouTube. Even Facebook (FB) could make a play for the market.

Investors in Netflix stock are also worried about the heavy costs of the international expansion and the aggressive investments in original programming, such as Orange Is The New Black, Narcos and Beast of No Nation. These are risky initiatives, and yes, there could be more nasty surprises ahead. A flop leaves Netflix at risk. So does a sudden downturn internationally if NFLX can’t keep up on the homefront.

Amid all this, Netflix still trades at more than 300 times earnings — grossly past the still-elevated numbers of 34X for Facebook and 47X for Twitter (TWTR).

Investors should be cautious with Netflix stock, and not hurry into a buy-the-dip play.

Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO StrategiesAll About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

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