Netflix, (NASDAQ:NFLX) stock has been on a tear for the past 2 years, rising from less than $60 to an all-time high of more than $480 last month. This rally has been fueled by rapid subscriber growth that always seems to beat expectations, no matter how aggressive those expectations had become.

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Netflix 2 Year Stock Chart, data by YCharts

Investors got a rude awakening last week. While Netflix managed to beat its guidance (and the average analyst estimate) for Q3 earnings, virtually everything else in its earnings report was discouraging. In fact, Netflix disappointed investors in 4 distinct ways.

Domestic growth slows

Slowing domestic growth was the first -- and most consequential way -- in which Netflix disappointed investors. In July, Netflix projected that it would add 1.33 million members in the U.S. during Q3. However, Netflix only managed to add 0.98 million domestic subscribers.

Netflix's management tried to downplay this missed forecast. For the past few quarters, Netflix has provided its internal forecast for various metrics including subscriber growth. It had warned investors that sometimes it would beat this forecast and sometimes it would fall short. However, this was the first time it fell short by more than 1% on any metric. Apparently, Netflix's forecasts aren't as conservative as many investors had believed.

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Fewer people than expected signed up for Netflix last quarter (Photo: The Motley Fool)

A bigger warning sign was the fact that domestic growth was much slower than in Q3 2013, when Netflix added 1.29 million domestic streaming subscribers. This is the second straight quarter with lower domestic subscriber growth year-over-year. However, while the Q2 shortfall could be explained by seasonality, that can't explain what happened last quarter.

Netflix executives attributed the weaker Q3 growth to the impact of a $1 price increase applied to new subscribers back in May, stating "Slightly higher prices result in slightly less growth." Netflix is also projecting slower domestic growth for Q4, with 1.85 million subscriber additions, down from 2.33 million in Q4 2013.

For the full year, Netflix now expects to add approximately 5.65 million domestic streaming subscribers. That's down 10% from the 6.27 million added in 2013.

This indicates that saturation may be setting in, leading to progressively slower growth in each of the next few years. It's too early to be sure that this is the case, as subscriber growth has only been slowing for 2 quarters now. Nevertheless, Netflix investors now need to take this threat seriously.

Rapid margin growth is ending

In addition to reporting slower domestic growth, Netflix also released a revised target for margin growth in its domestic streaming business. For the past 3 years, Netflix has aimed to grow its domestic streaming contribution margin by 100 basis points per quarter (or 400 basis points per year) on average.

So far, it has outperformed this guidance. Since Q4 2011, when Netflix began reporting domestic streaming contribution margin, that metric has risen from 10.9% to 28.6%. It expects to keep its streaming contribution margin roughly flat in Q4, which would amount to an average annual increase of almost 600 basis points for the past 3 years.

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In recent years, Netflix has grown its domestic streaming margin despite adding lots of expensive content (Photo: The Motley Fool)

In July, Netflix disclosed that it was reevaluating its expectations for contribution margin growth beyond the 30% level, which it expects to reach in early 2015. Last week, Netflix confirmed that it expects the domestic streaming contribution margin to rise by only 200 basis points annually going forward: less than half of the recent growth rate.

That includes the benefit of the recent price increase, which will hit longtime Netflix members in 2016. This implies that content costs will rise faster than ever thanks to the addition of new original series, Netflix's foray into original movies, new syndication deals such as the recently announced deal to bring Friends to Netflix, and the Disney pay-TV window deal announced in 2012.

New international markets aren't turbocharging growth

While Netflix's domestic results disappointed investors in terms of the pace of revenue growth and margin expansion, the company's international results weren't great, either. Netflix gained 2.04 million international subscribers, well below its forecast of 2.36 million international subscriber additions.

This was still a substantial acceleration from the 1.44 million international subscribers added in the prior-year period. However, Netflix expanded its international addressable market by more than 50% with its entry into new markets like France and Germany in September. In this context, the gains weren't very exciting.

That said, Netflix was only available in its new markets for the last 2 weeks of Q3. The real problem is that Netflix is forecasting only 2.15 million international subscriber additions in Q4.

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Netflix's new European markets aren't contributing much growth yet (Photo: The Motley Fool)

While that would be better than the 1.74 million international subscribers it added in Q4 2013, the projected increase in growth is less than 25%. That's not much "bang for the buck" given the scale and cost of Netflix's European expansion.

International losses will continue

The last way in which Netflix disappointed investors was its forecast that international losses will remain high for the near future. First, it announced that a change in value-added tax rules will increase its average VAT rate in Europe by 5 percentage points. Since it isn't raising prices to compensate, this amount comes directly out of its contribution margin.

Second, CFO David Wells stated that international contribution losses in the future could return to the peak level of $105 million reached in Q4 2012. That would be even greater than the $95 million international contribution loss projected for next quarter.

In other words, investors may be in for a prolonged period of high international losses, even though the international markets introduced before this year are collectively profitable. Losses from the recently launched countries and future launches will overwhelm the earnings from other international territories.

What next?

Netflix stock fell nearly 20% on Thursday, following this disappointing earnings report. Still, some Netflix bulls are undeterred. One analyst reduced his price target from $600 to $550, but still recommended the stock as a great buy at current levels. Another investment bank offered similar comments. Another analyst called the stock sell-off a "tempest in a teapot" that was an overreaction.

In some sense, a 20% sell-off seems harsh for a company that is still growing quite rapidly. However, I still think this is a bad time to bet on Netflix, because the stock price was far higher coming into the earnings report than it should have been.

There was no way to predict that Netflix's Q3 earnings report would fall short of expectations in so many ways. However, it should have been obvious that the company was likely to stumble at some point -- even the best businesses do from time to time. Netflix's pre-earnings stock price only made sense if Netflix could go for years without hitting any bumps in the road.

Analysts still seem to be overconfident about Netflix stock. In spite of all the news delivered on Wednesday, many analysts are still projecting strong earnings growth next year due to margin expansion. However, between rising corporate overhead costs, the European VAT increase, rising content costs, and slowing domestic growth, this scenario now seems less realistic.

Of course, it's possible that Netflix's subscriber growth is about to reaccelerate and it will return to its earlier trend of routinely crushing its guidance. Netflix's disappointing Q3 highlights why investors shouldn't count on that. Slower domestic growth may be the new normal, and international profitability may still be a few years away.

Adam Levine-Weinberg is short shares of Netflix. The Motley Fool recommends Netflix and Walt Disney. The Motley Fool owns shares of Netflix and Walt Disney. 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.