Netflix stock fell around 5% in after-hours trading Tuesday after the company posted slowing growth in new subscriptions and lower-than-expected profits, a sign that the streaming giant’s pandemic bump may be petering out.
The company said it added 2.2 million net memberships in the three months ended September 30, down from 6.8 million new memberships during the same period in the prior year. The additions bring Netflix’s total subscribers to nearly 195.2 million, lower than the 196.2 million Wall Street analysts had projected.
Netflix (NFLX) posted earnings of $1.74 per diluted share on $6.4 billion in revenue. Analysts had projected earnings of $2.13 per share on revenue of $6.38 billion, according to Refinitiv.
Netflix has thrived in 2020 as people were stuck at home during the global health crisis. The company posted colossal subscriber gains over the past two quarters, which helped drive its stock up nearly 70% this year. But there have been questions about whether it can continue that momentum, especially as competition from other streaming providers ramps up.
New subscriber growth falls
The company attributed the slowing growth in new memberships during the third quarter to its “record first-half results” — suggesting that because so many new customers subscribed during the earlier months of the year, fewer were left for the third quarter. Netflix had initially expected to add 2.5 million new paid memberships during the quarter.
However, it noted that it has added 28.1 million paid memberships during the first nine months of 2020 — more than the total number of new paid memberships in all of 2019. Netflix also said that “retention remains healthy and engagement per member household was solidly up year over year” during the quarter.
Netflix forecasts adding another 6 million new paid memberships during the final three months of this year, lower than its net adds during the fourth quarter of 2019. But that would bring total new memberships for the year to 34 million, still well above the prior annual high of 28.6 million in 2018. It also expects paid net adds to be down year-over-year in the first half of 2021, given the massive spike earlier this year.
“The state of the pandemic and its impact continues to make projections very uncertain, but as the world hopefully recovers in 2021, we would expect that our growth will revert back to levels similar to pre-COVID,” the company said in a release.
“We continue to view quarter-to-quarter fluctuations in paid net adds as not that meaningful in the context of the long run adoption of internet entertainment, which we believe is still early and should provide us with many years of strong future growth as we continue to improve our service.”
The state of content production
Despite disruptions from the pandemic, Netflix said it is “making good and careful progress returning to production” — something that’s especially important given increased competition from new streaming market entrants. The company said production has resumed on some of its biggest titles, including “Stranger Things” season four, and it expects the number of Netflix originals launched on the platform to be up year-over-year in each quarter of 2021.
Growth in international markets is especially important for Netflix going forward, as it nears a “saturation point” in the US market, Synovus Trust Company Senior Portfolio Manager Dan Morgan said in an investor note ahead of the earnings release.
In its report, Netflix pointed to its investments in local language programming and the success of the series “Indian Matchmaking,” which it said was watched by a quarter of the company’s Indian members and millions of members outside of India within its first four weeks.
“Our content successes highlight our ability to tap into our global audience of nearly 200m members and underscore the notion that content is discovered on Netflix,” it said in the release.
Some analysts have raised questions about whether Netflix might raise prices in the United States next year, after it recently hiked monthly rates in Canada and Australia.
Higher prices could mean losing some customers, Bernie McTernan, a senior analyst at Rosenblatt Securities, said ahead of the release.
“We did a streaming video survey, and a substantial amount of respondents indicated that they would cancel Netflix or reduce the number of months that they subscribed to Netflix given a one or two dollar price increase,” McTernan said.
During a call with analysts following Tuesday’s report, Netflix executives didn’t offer any specifics on the company’s plans for pricing. But Greg Peters, chief operations and product officer said Netflix’s “core model” is investing customers’ subscription money into improving the service and its value to consumers.
He added: “If we do that well, and we seek to every day be better about pretty much every component of how we’re investing, and make that efficiency and effectiveness better, we will deliver more value to our members, and we will occasionally go back and ask those members to pay a little bit more to keep that virtuous cycle of investment and value creation going.”
Peters said Netflix is also looking at new ways of getting consumers to try out the service, including offering Netflix for free to an entire country for a weekend, something he said it plans to try in India.