Success brings its own pitfalls. The better a company does, the more investors love it. And they keep on showing their love by pushing up shares until the price-to-earnings ratio (P/E) moves into nosebleed territory. One false move and the richly-valued stock can take a beating.

No stock better highlights this notion than Netflix (Nasdaq: NFLX). The DVD rental firm has had an historic run. Its sales rose more than +1000% from 2002 to 2009, while earnings per share have risen at least +37% every year in that stretch (with the exception of 2006, when profits rose only +10%).

For a number of years, Netflix had as many detractors as supporters. Short sellers piled in to the stock, assuming that the company would eventually be the victim of technological obsolescence, as cable companies boosted video-on-demand services. As recently as 2007, shares still sold for less than $20. Since then, Netflix has maintained its white hot growth, leading shares to rise more than +500% in the last three years. And that gain meant that shares were now worth 60 times trailing earnings and 45 times projected 2010 earnings. Priced to perfection, as they say. Priced to perfection also means any misstep will be trouble.

#-ad_banner-#Well, on Wednesday evening, Netflix finally stumbled. That’s when the company announced that second-quarter sales were at the low end of expectations, and that it is now spending more money to harvest new subscribers.

Subscriber acquisition costs (SAC) were $24.37 per subscriber in the most recent quarter, up from $21.54 in the first quarter of 2010. We saw the same problem emerge with wireless service providers and satellite TV companies. They started to spend more on subscriber acquisition costs just as sales started to flatten.

Is this scenario replaying at Netflix? Well, signs are emerging that the days of heady growth will soon be over. For example, an increasing number of new customers are signing up for the one-rental-at-a-time $8.99 service, but a rising number of existing customers are also downgrading to that plan from higher-priced plans. The average revenue per user (ARPU) dropped -7.8% from a year ago to $12.29.

But it’s too soon to write off the company. After all, more so than any of its peers, Netflix has aggressively prepared for the day when all movies are downloaded. To its credit, the company has said for quite some time that DVD-by-mail is only an interim step. The company even likes it when customers stream movies form a Netflix server rather than get them in the mail, as it saves postage and handling costs. Moreover, Netflix has done an outstanding job of locking up major movie studios to long-term deals. And thanks to continued robust subscriber gains, Netflix now has 15 million fairly loyal customers. A just-announced move into Canada could eventually add up to two million more users.

So Netflix isn’t going away. It’s just morphing. But investors need to keep an eye out for any new competitors. The movie studios would love to see other options emerge so they can gain better negotiating leverage against Netflix. More than likely, Netflix’s costs will rise as it has to cut more studio-friendly deals, and as it pays more in marketing to acquire those last holdouts that don’t yet get DVD rentals.

Action to Take –> But back to that pesky high P/E ratio. Netflix now looks on track to earn roughly $2.85 a share this year, and $3.50 to $3.75 a share next year. Even with Thursday’s -10% selloff, shares still trade for 38 times projected 2010 profits, and about 30 times next year’s profits. But looking beyond 2011, growth looks set to sharply slow, putting that P/E ratio out of whack. Shares look like they’ll keep falling as investors slowly adjust to the reality that Netflix is nearing the end of a stunning growth phase.