Netflix (NFLX 0.01%) stock had been on a tear coming into its second-quarter earnings report, as excitement over a subscriber bump from its paid sharing rollout helped drive the stock price up 40% over the last three months. However, the leading streaming stock sold off after its earnings report on Thursday as weak revenue guidance in the third quarter overshadowed 5.9 million subscriber additions in the second quarter.

Additionally, there were other comments in the shareholder letter that may have turned off investors. Let's take a look at three reasons you may want to sell Netflix stock after the latest report.

Two people sitting on a couch watching TV.

Image source: Getty Images.

1. Advertising isn't moving the needle (yet)

Netflix's decision to launch an advertising business last year was arguably its biggest move since it went into original programming a decade ago. The company had long pooh-poohed advertising, saying that offering an ad-based tier would complicate the business model and the product for consumers.

But former CEO Reed Hastings had a change of heart when he realized that advertisers were following the eyeballs that were moving from linear TV to streaming. Netflix's sudden slowdown in subscriber growth last year also helped convince it to launch the ad tier.

The digital-ad market is enormous, and Netflix has a huge audience. But its initial efforts to build an advertising business have yet to be fruitful.

The company launched ads last November, but management said in its shareholder letter that revenue from advertising isn't yet material. The vast majority of Netflix subscribers continue to pay for the ad-free tiers, and the addition of a cheaper ad-based tier doesn't seem to have attracted a significant jump in new members.

Management added, "Building an ads business from scratch isn't easy and we have lots of hard work ahead, but we're confident that over time we can develop advertising into a multi-billion dollar incremental revenue stream."

That may be true, but based on the initial results, it looks like it could take several years for the company to create a multibillion-dollar ad business.

2. The streaming market is rapidly maturing

The streaming market has transformed in the last few years. Nearly every legacy media company now offers some kind of streaming service, and audiences are rapidly shifting from linear TV to streaming.

Netflix shared Nielsen data showing that in the U.S., the percentage of TV viewing time that goes to streaming increased from 26% two years ago to 37%, ahead of 31% for cable and 21% for broadcast TV. Notably, these rapid gains have come with relatively little subscriber growth for Netflix. 

After long dismissing the threat of competition, the company also called the streaming sector "intensely competitive" and noted that it faces competition from both legacy media companies that have a wealth of intellectual property and tech giants like AppleAmazon, and Alphabet's YouTube, which are awash in cash to spend.

The competitive landscape is much different than it was a few years ago when Netflix was nearly alone as a global streaming business and was able to license content from the cable giants. Given that shift, its competitive advantage seems to have diminished, as well.

Though its large global audience of nearly 240 million paying members is an advantage, Netflix has no inherent edge in content creation, which may be the most important asset in this new era of streaming.

3. The company is running out of investment ideas

Two years ago, Netflix announced that it would be sustainably free-cash-flow positive, delighting shareholders. It also surprised them, however, by saying it planned to use excess cash to buy back stock.

In the second quarter, Netflix repurchased $645 million in stock, spending roughly half of its net income on repurchases. It expected share repurchases to accelerate in the second half of the year.

There's nothing inherently wrong with buying back stock. It's a popular tool for returning cash to shareholders but is typically emblematic of slower-growing companies with cheaper stocks. By spending excess cash on repurchases, Netflix is signaling that it doesn't aim to grow much beyond its current content-spend level, nor does it plan any other major cash outlays, such as an acquisition. 

Netflix stock also isn't cheap at a price-to-earnings ratio of roughly 50 before the after-hours sell-off. So its share repurchases aren't going to move the needle on the stock. Even if it spent all its profits on buybacks, it would only reduce shares outstanding by 2% this year, which increases earnings per share by 2%. 

Netflix can't seem to find a better way to use that cash, such as buying a gaming company, investing in a start-up, or even just earning high-yield interest. This is evidence that the company is low on ideas.

Altogether, the second-quarter report paints a picture of a growth stock with its best growth days behind it. The business is still solid, and profits should continue to grow, but investors should temper their expectations for growth in the share price.

If this is the start of a new bull market, they can likely find better opportunities elsewhere.