Netflix beats in Q1, but investors sold stock after report -- bad sign?

Of course, one of the bigger parts of the Netflix story is the subscriber base. The company said it increased subscriber counts by 25%, coming in at 10.3 million members. 98% of that statistic represents paying customers. Here are some other positive elements: the gross margin went up, subscriber acquisition costs went down, and free cash flow according to the company's calculation more than tripled to over $15 million. Cash from operations was flat, however.

Netflix is certainly holding its own in the DVD world. Consumers love the company's convenient distribution model, one that gives ample competition to Blockbuster (NYSE: BBI) and retailers such as Wal-Mart (NYSE: WMT) and Amazon (NASDAQ: AMZN). Why buy DVDs when you have access to a great rental solution?

Longer-term, however, Netflix has its challenges. The transition to the Blu-ray medium, as well as competition from video-on-demand platforms such as what is seen on Comcast (NASDAQ: CMCSA), is changing the future value of the DVD-rental model. Netflix is making all kinds of deals in the world of digital streaming, as this item mentions, as a way of prepping itself for the time when physical DVD rentals may not be as attractive to the consumer.

Shares of Netflix sold off in the after-hours session yesterday. They were down well over 5% at the time of this writing. Given how good the numbers were, should we be surprised? Not necessarily. You see, Netflix has had a very good run. The stock is firmly in the green over all time periods. Year to date, Netflix has risen 50% as of Thursday's closing price. I don't think, therefore, that it's too shocking that some investors sold their shares. In fact, Zac Bissonnette recently discussed the possibility that Netflix is overvalued.

If you've got profits on a Netflix position, I'd say that taking some of it off the table might be a wise consideration. If you don't already own the company, I'd say that waiting for a big pullback might likewise be prudent. Netflix had a more than respectable quarter, but you've got to be careful when it comes to this hot stock. Its rally may run out of fuel at some point.

Disclosure: I don't own any company mentioned; positions can change without notice.