Netflix's (NFLX 1.31%) stock price recently tumbled after the company posted its first-quarter earnings. It cleared analysts' estimates on the top and bottom lines, but its subscriber growth and second-quarter guidance missed expectations.

Netflix's revenue rose 24% year over year to $7.16 billion, beating expectations by $20 million. Its net income jumped 141% to $1.71 billion, or $3.75 per share, which also topped estimates by $0.75 a share. Its number of paid subscribers grew 14% to 207.6 million, but missed its own forecast of 209.7 million.

Netflix expects its revenue to rise 19% year over year to $7.3 billion in the second quarter, and for its number of paid subscribers to increase 8% to 208.6 million. However, analysts had expected its revenue to rise 20%, with 11% subscriber growth.

Netflix's office in Los Angeles.

Image source: Netflix.

That slowdown suggests Netflix will face tougher comparisons as the pandemic passes and competition heats up across the streaming market. It's offsetting some of its slower subscriber growth with price hikes, but that strategy could impair its ability to compete against cheaper rivals.

Faced with these challenges, investors probably didn't expect Netflix to launch a big buyback plan. Yet the company's board still approved a new plan to buy back up to $5 billion in shares, with no fixed expiration date. Let's see why that plan doesn't make any sense.

Netflix has plenty of other ways to spend $5 billion

Stock buybacks are usually effective ways for mature companies to spend their excess cash after they tame their debt and run out of fresh ways to expand their business.

A woman eats popcorn as she watches a movie on her laptop.

Image source: Getty Images.

Netflix doesn't fit that profile -- it's a growing company that has a messy balance sheet but plenty of investment opportunities.

It ended the first quarter with $8.4 billion in cash and equivalents while generating a free cash flow of $692 million. But it was also still shouldering $699 million in short-term debt and $14.9 billion in long-term debt.

Netflix plans to spend over $17 billion on new content this year while keeping its total gross debt between $10 billion and $15 billion.

That balancing act could be difficult to pull off as its growth decelerates and well-funded rivals like Walt Disney (DIS -0.47%), AT&T's (T -1.83%) HBO Max, Apple (AAPL 0.92%), and Amazon (AMZN 1.47%) all ramp up their spending on original shows and movies. Earmarking $5 billion for buybacks as it faces these existential challenges is an odd move.

It only represents a small slice of the company

Netflix's stock price has risen nearly 20% over the past 12 months, and it trades at about 40 times forward earnings and eight times this year's sales.

Those valuations aren't too high for a company that is expected to grow its revenue and earnings 19% and 71%, respectively, this year. However, $5 billion only represents about 2% of Netflix's enterprise value -- which means the entire buyback won't significantly reduce its float or boost its EPS.

Instead, Netflix will likely use its buybacks to offset the dilution from its own stock-based compensation, which caused its number of outstanding shares to rise more than 3% over the past five years. If that's the case, Netflix's retail investors won't benefit from its buyback plans at all.

Netflix should shore up its defenses

During the conference call, CFO Spence Neumann said Netflix's "number-one priority" was still to "invest strategically into the growth of the business" -- but that it could also "return excess cash" to its shareholders via buybacks.

However, I'd argue that it's the wrong time to even consider buybacks. Disney+ hit 94.9 million subscribers last quarter, while HBO and HBO Max now have over 41 million domestic subscribers.

Apple, which recently surpassed 600 million paid subscribers across all its services, bundled together six of those services as "Apple One" last year. Amazon also bundles its streaming video service into Amazon Prime, which recently topped 200 million subscribers worldwide.

All these competitors could pull subscribers away from Netflix. The best defense would be to continuously spend all its cash on fresh content or taming its debt instead of launching pointless buybacks.