Netflix (NASDAQ:NFLX) has had no trouble adding to its global subscriber base in the last two years. It has recovered strongly from the "Qwikster" debacle of 2011, growing from 25.6 million global subscribers in mid-2011 to more than 44 million by the end of last year.

However, despite rapid revenue and subscriber growth, Netflix's earnings power still has not recovered to pre-Qwikster levels. (The company posted its best-ever quarterly EPS of $1.26 in Q2 2011.) Netflix should be able to retake that level in 2014 or 2015, but its long-term earnings growth potential is not quite as great as bulls project.

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Netflix's revenue has soared since 2011, but profits haven't fully recovered yet.

Rising content costs are the key factor that has prevented Netflix from turning its rapid revenue growth into big profits. Moreover, the company's recent annual report provides further evidence that content costs will continue soaring higher, keeping earnings well below a level that could support Netflix's $400-plus stock price.

Content costs rising
Netflix's recently released annual report details the rise in content costs for 2013. In the domestic streaming business, "cost of revenues" rose by $290 million, or 19%. This alone offset more than half of the segment's revenue growth.

Netflix attributed $226 million of that increase to higher content licensing costs. The remaining $64 million increase was the result of higher costs for things such as content delivery, payment processing, and customer call centers.

Content costs rose even more quickly outside the U.S., as Netflix has more work to do to build up its content library in international markets. In 2013, "cost of revenues" skyrocketed by $299 million -- or 63% -- for the international streaming segment. $272 million of that increase went to content licensing.

Revenue growth is not enough
Globally, Netflix's streaming revenue rose by nearly $1 billion in 2013 compared to 2012. This was an impressive result, but about $500 million of that went to cover increasing content costs. Meanwhile, other "contribution costs" such as content delivery, payment processing, and marketing increased by about $125 million, other expenses rose by more than $100 million, and DVD profits declined by about $100 million.

When all was said and done, the big increase in content costs -- along with smaller cost increases in other areas -- meant that Netflix grew its adjusted net income by a little more than $100 million last year. That looks very impressive next to the company's paltry 2012 net income of $17 million.

However, Netflix's market cap is now roughly $25 billion. Even if Netflix continues growing adjusted net income at the same rate through the end of the decade (about $110 million per year, on average), net income would still be less than $1 billion in 2020.

It seems clear that investors have higher hopes than that for Netflix. If Netflix's net income is still below $1 billion in 2020, the stock would need to trade for nearly 30 times earnings (well above the market average) just for the stock to stay at $400. For Netflix stock to beat the market, it will need much more earnings growth by then.

Content costs will continue rising
The continued rise in content costs will make that difficult. Netflix has stated in its "long-term view" that it plans to spend nearly $3 billion on content in 2014. It's not possible to compare that directly to 2013 content costs. However, Netflix's streaming "cost of revenues" totaled $2.62 billion last year, and that also includes things like content delivery costs and payment processing costs.

If content costs represent 85% to 90% of the streaming "cost of revenues," Netflix spent between $2.23 billion and $2.36 billion on streaming content last year. The guidance therefore suggests that content cost growth will exceed last year's $500 million figure in 2014.

Netflix's cash outlays will be even higher: The company already has $2.97 billion in content commitments for 2014. That does not include payments for content for which Netflix does not know the exact price yet, and it obviously does not include any content that Netflix might add (or renew) during the course of 2014.

Cash content costs are running ahead of "accounting" costs primarily due to the nature of original programming, which requires more up-front investment. However, in the long run, cash costs and accounting costs always converge. High cash content costs in 2014 are a signal that content cost increases will continue flowing through to Netflix's income statement in future years.

Foolish conclusion
Netflix is on a roll. The company added more than 11 million subscribers last year, and adjusted net income soared from just $17 million to nearly $130 million. However, as impressive as that result was, Netflix will need to take earnings growth to a whole new level to justify its $400 price tag.

Rapid growth in content costs will prevent Netflix from achieving sufficient earnings growth to drive the stock higher. Even if Netflix continues to grow earnings by around $110 million a year through the end of the decade -- boosting EPS nearly seven-fold in the process -- it still wouldn't be enough to move the stock much.

Netflix bulls have to hope that content cost growth tails off before the company starts saturating the domestic market. However, the recent experience of major cable and satellite operators shows that even when you've saturated the market, content providers will continue looking for big raises. As a result, I continue to think the downside risk far outweighs any upside for Netflix stock.

Adam Levine-Weinberg is short shares of Netflix. The Motley Fool recommends and owns shares of Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.