Does Netflix Still Have Room For Growth?

Netflix’s Q3 earnings report disappointed as subscriber growth slowed down to 2.5 million, leaving investors asking if it can recover by the end of the year?

Oct. 29, 2020

In the first few months of the year, Netflix’s (NASDAQ: NFLX) growth had been kicked into fifth gear as stay-at-home restrictions were announced globally. So why did Netflix lose momentum this quarter?

Netflix’s Earnings Report 2020 

‘Stranger Things’ have happened than Netflix’s 2020 third-quarter earnings report, which missed on earnings and new subscribers but smashed revenue expectations. Earnings per share (EPS) were reported at $1.74 versus the $2.14 that analysts predicted, on revenue of $6.44 billion. Since the report was published last week, shares have fallen almost 8%. 

The original-series producer did not manage to top Wall Street’s estimates of new paid additions either, which fell short at 2.2 million. Netflix warned investors about the inevitable slowdown of new paid subscribers after the coronavirus accelerated signups that would otherwise have happened later in the year: 

“As we have highlighted in our recent investor letters, we believe our record first half paid net additions would result in slower growth in the back half of this year.” 

As the colder months settle in and we all unwind in front of the TV, Netflix is expecting a stronger fourth quarter for 2020 and projects to add 6 million new paid subscribers. This would be an amazing achievement and would bring the streaming giant new paid additions to 34.1 million this year, up from 27.8 million in 2019. From another perspective, those figures would only equal a growth rate of 20%, the same as 2019, and lower than in 2018 when it experienced a 26% increase.

The company stated that it is still on track for smashing 34 million net paid additions for 2020. However, at the end of Q2, Netflix predicted it would pull in 2.5 million subscribers in its third quarter. The video-sharing giant appears to have already saturated the North American market, so it will be very difficult to add new members in these areas. Management of the company expects subscriber growth to drop 14% in 2021, to about 28 million a year.

However, international growth for the company does look promising, Netflix has already opened offices in key European markets Germany, Italy, and Britain, while the streaming service had massive success with hits like ‘Elite’ (in Spanish) and ‘Dark’ (in German). In India, Egypt, and Vietnam Netflix faces no real competition, helping explain why it invested $400 million in Indian originals this year.

Worries over whether Netflix has enough content for this year, due to slow production times, were answered as Ted Sarandos, Netflix’s chief content officer, stated: “Our 2020 slate of series and films are largely shot.” The streaming service also confirmed that content production is almost back to normal this year, with 2021 unlikely to experience delays. If the company can deliver new content, it should be able to keep up with the number of hours watching time viewers now dedicate in their ‘socially-distanced’ lives without users having to switch to a competitor, like Amazon Prime Video (NASDAQ: AMZN), which had over 150 million subscribers at the end of 2019. Netflix does have very loyal fans, in a recent poll viewers that said they would pay more for Netflix membership rose from 47% in December 2019 to 55% this May.

Is Netflix Still a Buy? 

The pandemic resulted in a short-lived boost of subscribers for Netflix, which has worried investors who predicted the surge in subscriber numbers to continue throughout the year – is this the beginning of continued slowing growth for Netflix? It’s more likely that pandemic-fueled subscriber numbers had to come back down eventually. 

Overall, the stock is still up 50% year to date making it a worthy choice for investors, as one of the best-performing companies of the year. With its loyal fans, original series’ and emerging new markets – Netflix doesn’t look like it’s going anywhere.

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