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Why Netflix stock deserves to be shredded after its latest earnings report

Brian Sozzi

It could be time to book profits on Netflix (NFLX), which has skyrocketed 34% this year.

And the reason for doing so is easily found on the streaming giant’s investor relations page under the financial reports section.

At first blush, Netflix delivered in the first quarter... and then some. Netflix reported first quarter earnings of 76 cents a share versus Wall Street analyst estimates of 57 cents a share. Net sales clocked in at $4.52 billion, slightly above forecasts for $4.5 billion.

Netflix added 9.6 million total new subscribers in the quarter, up 16% from a year ago. Analysts estimated 8.94 million new additions.

Nevertheless, Netflix shares dropped as much as 4% in after-hours trading Tuesday. The stock fell 1% on Wednesday pre-market.

Some warning signs

Here are several of the red flags Yahoo Finance dug up on Netflix’s quarter:

  • Netflix sees a deceleration in new subscriber additions in the second quarter to 5 million. Wall Street had expected 6.09 million.

  • Sales growth slowed for the fourth straight quarter.

  • Operating profit margins fell 190 basis points from the prior year.

  • The year-over-year growth trend in paid memberships also continues to be lower.

  • At an outflow of $460 million in the quarter, Netflix burned cash at a faster rate than the year ago quarter ($287 million).

Some of Netflix’s commentary on its earnings press release is unlikely to help sentiment, either.

“We’re working our way through a series of price increases in the U.S., Brazil, Mexico and parts of Europe. The response in the U.S. so far is as we expected and is tracking similarly to what we saw in Canada following our Q4’18 increase, where our gross additions are unaffected, and we see some modest short-term churn effect as members consent to the price change,” Netflix said.

Netflix isn’t perfect

Netflix media service provider's logo is displayed on the screen of a television. (Photo by Chesnot/Getty Images)

Without question, Netflix is a tech titan. Despite the impending threat of Disney’s new streaming service, Netflix will remain the dominant force in the industry for the foreseeable future. The company’s investment in original content and global infrastructure pretty much are unrivaled.

“We don’t anticipate that these new entrants will materially affect our growth because the transition from linear to on demand entertainment is so massive and because of the differing nature of our content offerings,” Netflix said about Apple and Disney.

But that doesn’t mean Netflix deserves a free pass after a squishy quarter and outlook like the one just delivered. Netflix’s stock is priced for perfection (price-to-earnings multiple is 134 times trailing-12 month earnings, per Yahoo Finance data), and it didn’t deliver that level of perfection expected by the masses on Wall Street. It’s that simple.

Netflix’s costs of doing business are going up; Apple and Disney are legitimate threats in original streaming programming and consumers have showed a willingness to re-evaluate their Netflix subscriptions amid another round of price hikes by Reed Hastings.

Netflix isn’t MoviePass by any stretch of the imagination, but it isn’t perfect. And neither is its stock right now.

Brian Sozzi is an editor-at-large at Yahoo Finance. Follow him on Twitter @BrianSozzi

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