Well guys, there's no two ways about it - we're waist-deep into earnings season, and it's time to start doing some serious soul-searching with the market's most storied stocks. One of the names you'll really want dive into is reporting last quarter's results as I send this newsletter out... Apple (AAPL). So, I won't be able poke and prod those numbers for you until tomorrow. That may be for the best though. I'd rather take a little time and do it right, rather than rush through the quarterly filings in order to ferret out the key details others may have overlooked. I have had time to dissect the Netflix (NFLX) numbers though, and as troubling as they may have seemed on the surface, I think they get even worse when you look under the hood. First things first. In Q2, NFLX posted a profit of $0.49 per share, well up from the year-ago bottom line of $0.11, and handily topping estimates of $0.40. Revenue of $1.07 billion was right on target for last quarter, and was well above the year-ago figure of $889.2 million. So why'd the stock pull back more than 3%? Well, there are a few good explanations, all of which may have been a factor. Being overbought to begin with didn't help, but the biggest stumbling block was disappointing subscriber growth. The company was looking for 900,000 new members, but only got 630,000. That's still leaps and bounds better than the year ago Q2 subscriber growth figure of 420,000, but with the stock up 350% since this point in time last year thanks to the promise of original programming like House of Cards and Arrested Development, there's zero room for disappointment. You know what though? I don't think any of that debate is the important part of the Netflix story. The numbers that I believe mean so much more are the ones nobody's talking about because they don't appear on the income statement. I'm not going to have time or room to do this explanation justice, so I'm going to ask you to absorb the gist of what I'm saying and trust the idea. Fair enough? Netflix's balance sheets and income statements don't fully reflect the company's financial health. All the content agreements the company has made for movies from Disney, the Marvel franchises, and Star Wars (just to name a few)? Those obligations are in place, but they don't show up on a balance sheet as liabilities until that content is used... a GAAP-compliant method, though a method that has many critics. Either way, the off-balance sheet obligations are growing, now at more than $3.0 billion, and at some point in time will not only trickle onto the balance sheet one way or another, but also onto the income statement. The nature of the way the company must do its accounting, however, is already waving red flags on the cash flow statement. To give credit where it's due, Netflix was technically cash-flow-positive last quarter, to the tune of $33.9 million thanks to the $29.5 million the company booked on the bottom line of its income statement. That's a nice turnaround from the $12.2 million negative cash flow Netflix booked last quarter, and the negative cash flows for the two quarters before that. What's obscured, however, is that the company is forever amortizing (boosting the net cash flow) more and more of its programming and content costs. Last quarter's $510 million in amortized content costs is the most the company's ever posted, and that uptrend is still going strong. That amortized $510 million is roughly $24 million stronger than the prior quarter's total, and could also be pegged as the big reason cash flow turned positive in Q2. The company can do this because all that digital content is technically treated as a long-term asset that depreciates over time, since it will drive revenue over a long period of time. Confused? Here it is in plain English. Netflix doesn't have to show the full expense of all that original in-house programming and other new content when the checks are actually written. It can delay booking those costs because the accounting methodology says since subscribers will be watching existing old episodes of House of Cards several years after they've been made, that production expense can also be spread out over time. By then it's almost impossible to figure out what spending is driving current revenue (though I seriously doubt TV fans are going to subscribe to Netflix in 2017 because of original shows produced in 2013). And just for the record, there are plenty of people who hate this accounting methodology, suggesting it doesn't paint a clear picture of what's going on with the company. It's more than a small potential problem, however. The word is that it costs Netflix about $50 million per year per series to create all that original programming. More of it's on the way too, so the total original content costs should be creeping higher. If my count is correct, Netflix now produces five original programs. That's a big chunk of change for a company that will do well to make $200 million this year (with paper thin cash flow to boot) despite revenue approaching $4 billion. Netflix also spending more and more on third-party programming; you know licenses for Disney's movies and the next Star Wars films weren't cheap to acquire either. The math still works for the time being because expenses are being delayed and/or amortized, but make no mistake - there's a race on. Can Netflix actually grow the subscriber base fast enough to meet its future (though unclear) commitments without destroying the cash flow statement, and eventually, the income statement? The company even acknowledged how it could easily slip back into negative free cash flow in coming quarters as it gets into its original content groove. I've long had my doubts, but after last quarter's very, very disappointing subscriber growth number despite ultra high hopes that House of Cards and Orange Is the New Black would be a big draw, I think it'll be a miracle if subscriber revenue catches up in time with future content expenses to stave off huge fiscal headaches. I think the overall revenue trend and the expense trend could have this head-on collision sometime in 2014 when the pace of subscriber growth really starts to slow. But hey, that's just one man's opinion. Do you agree or disagree with my pessimism? Let's make Netflix today's hot button stock. If you want to rate it a buy or a sell, just click on the link and cast your ballot. If you want to put some thoughts in writing, you can do that too (and feel free to disagree with my thesis). Either way, I suspect we'll get a lot of great trading action from NFLX in the very near future, so if you're looking for a swing trade, this is one I'd look to first. Alright, we didn't get a chance to look at the overall market, but I don't think we missed anything. Looks like stocks were mostly on hold today, with investors wanting to see what Apple had to say. We'll get back in the market-handicapping lane tomorrow. Side note: Did everybody realize you can now apply stops and trailing stops to your portfolio picks at the site? That makes trading super-easy, and hands-off for when you can't check in every day.