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NFLX Stock: No First-Quarter Surprise for Netflix, Inc.

Netflix, Inc. (ticker: NFLX) reported first-quarter earnings after markets closed on Monday, and overall, the results were mixed.

While earnings beat expectations, revenue was in line, the company added fewer subscribers than expected, and earnings guidance for the second quarter was much lower than expected. Immediately after the release, Netflix stock dropped 5 percent in after hours trading before quickly recovering.

NFLX has now managed to beat earnings per share expectations for six consecutive quarters.

Its tendency to routinely surprise analysts is precisely why the stock has been one of Wall Street's top performers over the years. Before first-quarter numbers came out, Netflix stock was up 19 percent for the year, 32 percent in the last 12 months and 127 percent over the last two years.

[See: The 25 Best Blue-Chip Stocks to Buy for 2017.]

Here are a few key numbers from Netflix's first-quarter earnings release, and how they stacked up to estimates.

The quarter by the numbers. Earnings per share came in at 40 cents in the quarter, up over 560 percent from the same quarter a year ago. Wall Street was looking for EPS of 37 cents. Revenue rose 34.7 percent to $2.637 billion, slightly missing the FactSet consensus number of $2.644 billion.

But the numbers that NFLX investors really get jazzed about are subscriber numbers, since, after all, that's what drives the top line.

The company was expected to grow its total subscriber pool by 21.4 percent from a year ago, or 5.32 million people sequentially, to 98.925 million, according to FactSet. Instead, Netflix membership grew by 21.2 percent, or 4.95 million people sequentially, to 98.75 million.

Of the 4.95 million memberships that Netflix added in the first quarter, 1.42 million came from the U.S. and 3.53 million came from overseas. That disproportionate balance in the favor of overseas growth was no mistake: domestic growth has been slowing for years now, and the first quarter of 2016 marked the beginning of its focused push to become truly global.

"Overall these numbers seem solid, with subscriber growth still showing growing in the international market," says Michael Kramer, a portfolio manager on Covestor and founder of Mott Capital Management in Garden City, New York.

"I really don't expect the stock trade down on these results, and I really do not expect the stock to trade up much on this," Kramer says.

Going forward, Netflix expects to cross the 100-million-subscriber mark in the second quarter, adding 3.2 million subscribers globally. It sees revenue of $2.755 billion, in-line with Wall Street's $2.76 billion expectations, and EPS of 15 cents, below the consensus estimate of 24 cents per share on Wall Street.

An update on Netflix's strategy. Original content like "A Series of Unfortunate Events" and "Santa Clarita Diet" helped drive subscriber gains in the first quarter, although the company warned investors three months ago that its strong fourth quarter "likely pulled forward" some net additions from the first quarter of 2017 to the fourth quarter of 2016.

The second quarter should see further subscriber gains as "House of Cards" Season 5 hits the service on May 30.

[Read: The 10 Most Anticipated IPOs of 2017.]

Naturally, the primary growth will come from the international segment of the business -- where NFLX continues to invest heavily.

"Netflix has vowed to invest over $1.75 billion into more than 90 European productions, including licensed content, co-productions, and original productions, which should help its competitive positioning in the growing European over-the-top market," says Glenn Hower, senior research analyst at Parks Associates.

"As it closes in on the 100-million-subscriber mark, it seems more and more likely that the number of international subscribers will exceed the number of domestic subscribers," Hower says.

The problem(s) with being Netflix. Despite growing its quarterly profits more than six-fold, not everything is hunky-dory over at Netflix. There are two big problems brought on by Netflix's rapid growth.

The first is cash flow. This fiscal year, the company expects free cash flow of negative $2 billion, and most analysts think it will be 2018 or 2019 before Netflix can even think about becoming cash flow positive.

The second problem is competition, which there seems to be more of every day.

HBO Go, Amazon ( AMZN) Video, Hulu, and Alphabet's ( GOOG, GOOGL) YouTube are four of the most prominent competitors, but they hardly round out the laundry list of rivals entering the market.

Facebook ( FB) Video is growing rapidly in popularity. Sling by Dish ( DISH) gives you the option of skinny bundles, starting at $20 a month for more than 30 channels. Networks like CBS ( CBS) and the BBC are embracing direct-to-consumer streaming as well, and Comcast Corp. ( CMCSA) is planning a service to rival the likes of Netflix in 2018.

"The lack of innovation is a cause for some concern. While competitors are trying new models to challenge Netflix's position -- most notably live -- Netflix seems set on producing static content," says Greg Portell, lead partner at management consultant A.T. Kearney.

Valuation. Another side effect of growing at 20 to 30 percent a year is investor euphoria, and that can result in a lofty valuation. And by traditional metrics, Netflix definitely has one. Going into earnings, NFLX stock traded at 74 times forward earnings and over 7 times sales.

[See: 7 of the Best Stocks to Buy for 2017.]

The trouble is, Netflix is expected to keep reinvesting to grow its top line, and at some point, years from now, it will be able to cut back on some of those reinvestments or raise prices and -- poof! -- become a cash cow and profit machine. Until then, and as long as growth keeps up, it's really hard to assign any sort of normal multiples to shares.

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