Netflix (NFLX) has flown high this year, but its stock may be finally crashing down to Earth.
The streaming company revealed a seriously lackluster earnings report on Monday after the close, sending the stock tumbling more than 13% in after hours trading. Netflix missed the mark on revenue, but all eyes were on its subscriber growth, perceived by many analysts as the key to Netflix's long-term dominance as it chases international markets and spends heavily on content and marketing. In pre-market trading on Tuesday, shares were down 12.6%.
The results were a bummer, to say the least. Netflix added only 670,000 U.S. subscribers and 4.47 million internationally this quarter -- missing projections of 1.2 million and five million, respectively.
"The domestic miss is a bigger problem, as it implies they're approaching a ceiling," said Wedbush's Michael Pachter. "Taken together with the Q3 guide (down 200,000 year-over-year), they look like they are rapidly reaching full saturation."
The worse-then-expected subscriber growth may also signal that Netflix's pricing power isn't as mighty as some may assume, according to Needham's Laura Martin.
"It demonstrates that there's an inverse correlation between subscriber growth and price increases. This notion that they have pricing power is flawed," Martin said.
Netflix blamed the weak subscriber growth partly on currency issues, writing in its shareholders' letter that "we slowly adjust pricing over time to mitigate forex moves over the longer term, but when currency movements are rapid, they will affect our near term operating margin."
There were some bright spots Netflix's earnings: As noted by TheStreet's Eric Jhonsa, Netflix reported a 14% increase in its average selling price. That, together with a 26% increase in subscribers, drove a 43% increase in streaming revenue.
But the subscriptions are under the microscope this year because it could also signal that Netflix's growing slate of competitors -- including Amazon's (AMZN) Prime Video, Apple (AAPL) , Alphabet's (GOOGL) YouTube and others -- may be gaining ground.
"This is also indicative of more competition from alternatives, in particular Amazon Prime," Martin added. "These guys are spending more and more money, and yet subscriber growth is slowing because competitors are gaining ground."
Netflix has often defended their spending, with CEO Reed Hastings telling investors in July 2017 that blowing cash was an "indicator of enormous success." Netflix spent $8 billion on content in 2017, and has billions more in spending commitments for this year. It pays for some of that by selling debt, having raised $1.9 billion in debt in April. That could come back to haunt them later, according to Pachter.
"The fact is that their earnings power is pretty dramatically overstated -- cash flow is a better indicator of their financial health, and it's rapidly deteriorating," Pachter added. "That means more debt, and notwithstanding their comparison of debt to EV, banks don't look at it that way. Banks like to be repaid in cash, and expect positive free cash flow in order to keep lending them more money. I think this becomes a problem next year."