My Thoughts On Netflix's Q4: Time To Take The Chips Off The Table?

| About: Netflix, Inc. (NFLX)

Summary

By most accounts, Netflix delivered some great results in Q4.

But the big question for me now is where does Netflix go from here now that the big international expansion is largely complete?

What happens when Netflix begins its transition from growth company to maturing company?

I probably look forward to Netflix's (NASDAQ:NFLX) earnings report every quarter more than just about any other company just based on the unique way that it trades. Every quarter it seems that the actual financials are largely ignored in favor of just one number - subscriber growth. No matter how much money the company makes or loses, no matter how much cash the company burns through, no matter what the margins look like, everybody seems to only care about how many subscribers Netflix added in the quarter.

By most accounts, Netflix delivered some great results in Q4. Total revenue came in a little light but EPS beat expectations. Not surprisingly, U.S. subscriber growth continued slowing and missed expectations but international growth beat big time with 5.59M new subscribers topping estimates for 4.95M.

Other notes: Price grandfathering will end in Q2 and Q3. Could mean greater revenue but also greater turnover. Netflix also will finish the year with negative cash flow of about $921M. International expansion continues to drive costs.

The price increase will be an interesting test of customer loyalty. Customers on the $7.99/month HD plan can keep the monthly cost at $7.99/month but get SD only or upgrade to HD for $9.99/month. I never thought that many customers would blink if Netflix raised its monthly price by $1 but a $2 hike may be more of a tipping point. $2 is still quite small in the grand scheme of things but it might be enough to push those paying for the service but not really using it to just drop it altogether.

But the big question for me now is where does Netflix go from here now that the big international expansion is largely complete? The stock price has been inflated due to its ongoing growth story but what happens when Netflix begins its transition from growth company to maturing company? Netflix said at the beginning of the year that it's now live in 130 new countries (to go along with the 60 or so it was already in) with China the only major market that it hasn't penetrated yet. The company forecasted 6M new subscribers in Q1 and I wouldn't be at all surprised to see them top that number given the new markets it's now in.

But what then? Expansion will largely be complete and then Netflix will need to develop its subscriber base from within these markets. As is the case with most new products, demand will likely be hot once introduced and then cool off. U.S. growth has already cooled considerably. Once international growth starts showing signs of slowing, it could be bad news for the stock. Companies like FireEye (NASDAQ:FEYE), Twitter (NYSE:TWTR) and LinkedIn (NYSE:LNKD) all saw their stock prices plunge when they reported their growth had slowed. It feels to me like that time is coming for Netflix. There's a good chance it won't happen in Q1. May not even happen for the next quarter or two after that. But I think it's coming.

When Netflix's rapid growth phase comes to an end, investors aren't likely going to be willing to pay 100 times 2017 earnings estimates for the stock. Netflix is a curiously traded stock that investors seem to like to keep pushing up so a call to sell the stock now might be a quarter or two or three premature. But I just don't feel good owning the stock knowing 1) that it's so richly priced and 2) that its overseas expansion program is nearing an end.

Personally, if I'm long Netflix I'm at least considering taking some of that position off the table. Longer term, I'd be willing to take the entire position off the table. Last year's 130% gain coupled with what will likely be a gain of another few percent post-Q4 has been a wonderful ride for investors but now might not be a bad time to lock in that gain and step off the ride.