Netflix's earnings picture was a success, but what about the recession?

Netflix (NASDAQ: NFLX) had something of a flashy third quarter. The online DVD-rental company reported the numbers on Monday after the market closed. Revenues did well, rising 16% to $341.3 million. The bottom line, however, was an even better story. Earnings per diluted share on an adjusted basis rose 38% to 36 cents. How does this compare to Wall Street estimates? Beautifully, as analysts were looking for 34 cents per share. So management was able to deliver two extra pennies. It's cool when a company can go beyond the usual beat-by-a-penny routine, isn't it?

I applaud Netflix for its earnings data, but I can't say I'm a huge fan of its current cash-flow performance. Operating cash flow dipped nearly 6% to approximately $73 million. Free cash flow declined almost 28% to about $26 million. Looking at other numbers, I see that gross subscriber additions increased 18% on a year-over-year basis. Gross margin also improved.

Unfortunately, CEO Reed Hastings believes that the recession will negatively affect subscriber growth rates. Of course it will. At this point, every business, and more importantly to investors and traders, every stock is going to feel the wrath of the economy and the market bears. Sure, Netflix made deals with Disney (NYSE: DIS), Starz and Microsoft (NASDAQ: MSFT) that may help the company offset some of the economic realities out there, but I think the bottom line is that you'll have to be careful about buying Netflix at this point in time.