Netflix (NFLX  ) was 6% lower after hours after it fell short of expectations for earnings and new subscribers in the third quarter. The result wasn't entirely too surprising for anyone who had been paying attention to its past couple of results.

Both previous quarters featured a surprise increase in subscribers that the company attributed to the pandemic and warned would not be sustainable. It also said that subscribers were being "pulled forward". The subscriber spike masked a challenging set of conditions for Netflix. The cost of content is rising with the abundance of new, streaming services. There's also increased competition for talent which is also driving costs higher.

Inside the Numbers

In the third quarter, Netflix reported $1.74 in earnings per share, while analysts were looking for $2.14. Revenue came in slightly above expectations at $6.44 billion vs expectations of $6.38 billion. Net subscriber additions were also a big miss at 2.2 million, while analysts were looking for 3.6 million.

In its comments, Netflix said that a slowdown in subscriber growth was expected following the bigger than expected gain in the last couple of quarters. It also represents a decline from the 6.8 million subscribers added in 2019's third quarter.

In the fourth quarter, Netflix is projecting it will add 6 million new subscribers which would be below the 8.8 million added in last year's fourth quarter. Management also reiterated that it expects growth to resume its pre-coronavirus trajectories sometime in 2021.

46% of Netflix's new subscribers came from Asia-Pacific which is the company's fastest-growing area. One challenge that Netflix will have to face is that production has been deleted on its original programming. Less new shows might affect subscriber growth and customer retention.

The slowdown in production also has inflated Netflix's free cash flow as costs are temporarily lower. However, these costs will impact earnings in future quarters. In 2021, it's expected that Netflix's free cash flow will be negative $1 billion.

Stock Price Impact

Shares fell more than 6% during after-hours trading. Since early July, the stock has traded between $460 and $560. There were some hopes that the stock could break out to new highs with a strong report.

However, this doesn't seem likely with the underwhelming report. The company is also facing increasing competition in the form of new streaming services from Comcast (CMCSA  ), Disney (DIS  ), and HBO (T  ). Increasing competition leads to higher margins as it reduces pricing power and increases costs.