Shares of Netflix whipsawed into the red Wednesday, sliding as much as 7 percent at one point despite higher-than-expected earnings and a growing subscriber base.
But while the company is adding subscribers abroad, slowing user growth in the U.S., paired with negative free cash flows, may signal trouble in the core market of the business, one expert told CNBC's "Squawk on the Street."
"We're bumping up against the law of large numbers domestically," said Mike Olson, managing director and senior research analyst at Piper Jaffray. "Huge international quarter, and international is what investors are most excited about. But at the same time, you can't ignore a saturation point that we may be inching closer to domestically."
The entertainment technology company reported quarterly earnings of 7 cents per share Tuesday, beating estimates, and added 5.59 million total net subscribers in the quarter, up from 4.33 million additions in the previous year. But despite surging 10 percent in after-hours trading Tuesday night, shares of the streaming service have plummeted in regular trading as investors digest the positives and negatives of Netflix's international expansion.
"The positives are, we're super far from saturation — we're at mid-single digit penetration at this point so there's a lot of room to grow on that side," Olson said. "The negative is, we're at a point where we just don't know what a lot of these new countries are going to look like for Netflix. They don't have a brand there yet, they don't have content at this point, so there's a lot of spend that has to happen. And they're shifting a lot of the marketing resources into those countries, which could also be negatively impacting the U.S. market."
While CEO Reed Hastings pins his customers' "underlying desire" to Netflix's original content, the company must compete with an alliance of local media companies to expand that content internationally, according to a report that originally appeared in The Wall Street Journal. That competition is unlikely to get any less fierce, Olson said. But he still predicts significant international subscriber growth by 2020, and positive cash flows by 2017.
"Ultimately ... you do have to take a little bit of a leap of faith that they're going to grow internationally, and that will kind of be there on the other side to make good on some of this spend," Olson said.