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Netflix, Inc. (NFLX) Destroys Expectations, Stock Soars

Netflix, Inc. (Nasdaq: NFLX) stock catapulted 9 percent higher in after-hours trading on Monday after a blowout fourth-quarter earnings report that showed dramatically more subscriber additions than Wall Street expected.

First-quarter guidance also wowed the markets.

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NFLX earnings by the numbers. Not only did shares of the Los Gatos, California streaming video company finish at an all-time high Monday, they set new highs immediately after quarterly earnings came out. Netflix also surpassed the $100 billion valuation mark in after-hours trading.

NFLX posted earnings per share of 41 cents on revenue of $3.29 billion in the fiscal fourth quarter. These were almost exactly on the nose: Consensus figures from FactSet called for EPS of 41 cents on $3.28 billion in revenue. From Q4 2016, revenue grew 32.6 percent and EPS rose 173 percent, from 15 cents in the corresponding period a year earlier.

But as most longtime NFLX shareholders know, the number all of Wall Street is fixated on is Netflix's subscriber additions, which shows how many new people were added to the Netflix ecosystem -- hopefully never to leave -- in the previous quarter. In the mind of investors, new subscribers are streams of never-ending recurring revenue.

On that front, NFLX added 8.33 million new streaming subscribers in the fourth quarter, bringing total Netflix memberships to 117.58 million globally.

Analysts surveyed by FactSet expected just 6.37 million net additions in the fourth quarter, so this was a monster beat. Analysts had expected both domestic and international net adds to decelerate from the year before, but instead they both accelerated.

"The big driver was subscriber growth. International growth was astonishing," says Scott Freeze, chief investment officer of Sabretooth Advisors, the only actively-managed ETF that focuses on FANG stocks. International adds came in at 6.36 million versus 5.05 million expected.

NFLX also guided for EPS of 63 cents on revenue of $3.686 billion in the first quarter of 2018, breezing past the FactSet consensus, which called for EPS of 54 cents and revenue of $3.487 billion.

There's no way to paint that news in a bad light.

Pros for Netflix stock. Some investors have been skeptical of Netflix shares for years. But NFLX stock has routinely silenced the skeptics and the haters alike, and shares actually finished at $227.58, an all-time high, on Monday. Shares were up over 3.2 percent on the day -- and about 64 percent in the last year.

And while the Standard & Poor's 500 index has been doing quite well recently, it's only up about 25 percent over the last year.

One can understand why NFLX stock is a momentum investor's darling, a fact that certainly won't change after Q4 Netflix earnings.

There's nothing fancy going on here: Netflix has just continued to grow -- adding millions of subscribers each quarter and boosting revenues by 30 percent-plus -- far longer and more consistently than Wall Street ever expected.

The formula, increasingly, has been for NFLX to grow its investments in original content, differentiating it from other streaming platforms. A new series from David Fincher, "Mindhunter," as well as the second seasons of hit shows "Stranger Things" and "The Crown," and a fourth season of the cult hit "Black Mirror," helped attract subscribers last quarter.

[See: 7 of the Best Tech Stocks to Buy for 2018.]

But realizing the biggest long-term growth opportunities now lie outside the U.S., Netflix's 2016 push to take its programming global has been a smashing success and holds even greater promise than domestic adds.

Localized content is a leading priority, and the company released its first-ever Italian and German original shows, "Suburra" and "Dark," respectively, in the fourth quarter.

Cons for Netflix stock. On the other hand, anyone who owns NFLX stock -- or is thinking about buying Netflix shares -- should try to maintain a tight grasp of its weaknesses and risks so they can make fully informed decisions.

And while Netflix has almost singlehandedly changed the entertainment business, there are also some glaring issues with its business as it stands now.

The biggest problem? Making original content costs an arm and a leg. Management expects to spend between $7.5 billion and $8 billion on programming in 2018 alone.

"Netflix started as a 100 percent rerun service and now they have more original and exclusive content," says digital media veteran Jim Long. That has consequences since developing your own programming is far more expensive than licensing it from others.

Because of the capital-intensive nature of business, NFLX isn't cash-flow positive, with negative free cash flow of $524 million in the fourth quarter. Full-year 2017 negative FCF was over $2 billion, and the company expects negative FCF between $3 billion and $4 billion in 2018.

As long as this significant deficit continues, Netflix will need to tap the debt markets for this shortfall, increasing its indebtedness. As interest rates go up, this will take a tougher toll on the bottom line.

Another thing anyone who owns NFLX stock for the long-run simply can't ignore is the looming disruption at the hands of Walt Disney Co. ( DIS). Realizing that Netflix built a $100 billion business, in part, on the back of Disney's own content, The House of Mouse is pulling a switcheroo and cutting the cord on Netflix, pulling Disney, Pixar, Marvel and "Star Wars" films from Netflix in 2019. Worse yet, those titles will go on Disney's own upcoming direct-to-consumer streaming service, which will also debut in 2019.

Netflix CEO Reed Hastings is rightfully hailed as a Silicon Valley visionary and gamechanger, and what he's done in the last 10 years is remarkable. But the next 10 could actually be harder yet, as onetime partners -- other content creators -- increasingly view NFLX as a competitor.

More content owners are shunning Netflix's money and opting to stream with over-the-top services of their own, and competition from Amazon.com ( AMZN), Hulu, HBO, Disney and even Facebook ( FB), Apple ( AAPL), Twitter ( TWTR) and Alphabet ( GOOG, GOOGL) is driving up the cost of film industry talent.

[See: 7 of the Best Stocks to Buy for 2018.]

In light of these challenges, should investors be putting so much implied faith in Netflix working things out and growing earnings exponentially? At the close of the market on Monday, Netflix traded for 230 times earnings; Disney went for under 20 times earnings.

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