Netflix (Nasdaq: NFLX) stock had a very short-lived boost from Monday's earnings report.
The earnings report showed great news for the company - Netflix reported it ended Q3 with 29.3 million paid domestic users. The video streaming giant added 1.3 million U.S. customers in the third quarter and is on track to surpass Time Warner's HBO in paying viewers.
HBO had 28.96 million U.S. subscribers as of June 30, according to the latest data available, and CBS Corp's Showtime had roughly 23 million.
Netflix has benefited from the growing trend of households canceling cable TV subscriptions. It has expanded its library of titles by producing and funding original programs. Its "Orange Is the New Black" and "House of Cards" have garnered a great deal of social media chatter and critical acclaim. In fact, Netflix made history by being the first non-TV network to win an award at the 2013 Emmys for "Cards."
The news pushed NFLX stock about 10% higher in after-hours trading Monday. It hit a record high Tuesday of $389.16 before falling 9.15% to $322.52.
Profit-taking nailed the stock, which was up only about 1% by Wednesday at 2 p.m.
And this is exactly what Chief Executive Officer (CEO) Reed Hastings feared would happen when he warned of "investor euphoria."
NFLX and Investor Euphoria
As of Tuesday morning, Netflix stock had soared 440% in the past year, and 275% year-to-date.
CEO Hastings said in the investor conference call Monday night that while he was happy with his company's performance, there was more than that behind the stock's move.
"We have a sense of momentum driving the stock price," Hastings said on a conference call. "There's not a lot we can do about it."
Hastings likened the current investor frenzy to 2003, when the Los Gatos, Calif., company was the highest-performing stock traded on the Nasdaq.
He wrote in a note to shareholders that Netflix will focus on growing subscriber base and is doing its best to ignore the stock's volatility.
Wedbush Securities Analyst Michael Pachter said the stock's soaring price indicates investors are not concerned about the gap between net income and cash flow. The gap, $85 million for the first nine months of 2013, is the result of Netflix's steep investment in producing original content.
"That suggests to me that their earnings growth will be a lot less dramatic than the share price suggests," Pachter told USA Today.
One investor who was ready to pull out of NFLX stock: Carl Icahn.
Icahn dumped 3 million Netflix shares - half his stake - and pocketed an $800 million profit.
Just after 5 p.m. Tuesday, Icahn tweeted: "Sold block of NFLX today. Wish to thank Reed Hastings, Ted Sarandos, NFLX team, and last but not least Kevin Spacey..."
He included a link to the Schedule 13D filing with the U.S. Securities and Exchange Commission.
Will Netflix (Nasdaq: NFLX) Stock Go Higher?
Netflix subscribers are likely to stick around, with the company's content pipeline looking attractive...
This quarter, Netflix will debut its first animated original series in partnership with Dream Works Animation. Next year, the pair will collaborate on several other series.
Also in 2014, Netflix plans to double investment in original content.
Additionally, the company is eyeing overseas expansion.
"We plan to launch in new markets next year," Hasting wrote. "Our success this year in increasing international net additions to nearly the level of our domestic net additions shows sustainable momentum."
The company has partnered with Virgin Media in the U.K. to offer Netflix as an option in the cable company's set-top box.
"We are open to more of these integrations with cable set-tops around the word," Hastings wrote. "But given the fragmented technology footprints, we think it will be many years before cable set-top boxes match Internet set-top boxes for Netflix."
That means, for investors in Netflix stock, international expansion and heavy outlays for original programming could translate into weakness in 2014.
And, if in fact NFLX stock is like 2003, when investor frenzy drove the share prices six times higher in about a year and a half, then beware what could be next: Netflix stock fell about 75% in a year.
Investors should take a page from Icahn's playbook on this one. NFLX stock, boasting big gains, is just begging to be sold right now.