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Netflix's (NASDAQ:NFLX) stock has been heading south lately, losing 4.14 percent of its value on Wednesday and another 1.68 percent on early Thursday morning trade.

The reason this is news is that the stock has been on the mend in the last 3 months, almost doubling in value, since legendary corporate raider Carl Icahn revealed a 9.9 percent stake in the company; a deal with Disney also contributed to the rally. What is behind this decline?

Profit taking, perhaps. Perhaps disappointment following a Facebook (NASDAQ:FB) announcement that some investors expected to bear fruit for Netflix. It could also be concerns over next week's earnings report.

In spite of the bullish sentiment for a stock that has been propelled by hype over an impending sale of the company, Netflix's fundamentals are on a shaky ground (thin operating margins, revenue slow-down, declining earnings, and heavy debt load); its business model; and overseas expansion plans.

Forward PE*

243.70

Operating Margin

2.86%

Qtrly Revenue Growth (yoy)

10.10%

Qtrly Earnings growth (yoy)

-87.70%

Debt to Equity Ratio

55.80

FYE Dec 31, 2013.
Source: finance.yahoo.com

Like Amazon.com, Netflix sells something to end customers. But unlike Amazon.com, Netflix doesn't own anything. It doesn't have any production facilities, any warehouses. It's just a site where it sells somebody else's products-content developed by Starz, CBS, Disney, and the like.

In the short run, this may be a highly profitable business. In the long run, however, profits attract competition - The company is facing competition from Amazon.com (AMZN), Apple (NASDAQ:AAPL), and Google (NASDAQ:GOOG) - to mention but a few.

Netflix is further at the mercy of content providers that have a number of options: they can sell their content directly to the end customers or they can auction it to the highest bidder, allowing each to earn what economists call "normal profit," an average rate of return.

I'm really curious to know what Netflix is paying for the Disney deal. This means that Netflix's stock deserves a PE valuation closer to 15, rather than closer to 126!

As for Netflix's overseas expansion, the world isn't flat. Other countries lack the infrastructure, the intellectual protection enforcement, and the American passion for viewing movies. Hype should never be a substitute for due diligence. Conservative investors may want to stay away from the stock until the company provides some clarity about its earnings subscription growth next week. Aggressive investors may want to take a short position.

Source: What's Behind Netflix's Big Drop?