Netflix Management Is Pumping the Brakes on Growth Estimates

After a record-breaking quarter, the streaming giant is reining in expectations for future growth.

This article was originally written by Danny Vena of The Motley Fool

Expectations were high going into Netflix‘s (NASDAQ: NFLX) first-quarter financial report. It turns out that even the most bullish expectations were too conservative, and the company smashed its previous subscriber gains by a wide margin. The global pandemic and the accompanying stay-at-home orders left many consumers at home, turning to Netflix to while away the hours.

The streaming giant added a whopping 15.77 million new paying subscribers worldwide, up 23% year over year, bringing its worldwide tally to 182.86 million. Even domestic subscriber growth, which had been largely stagnant, took off, adding 2.3 million customers, up 23%.

Those numbers, as impressive as they are, had Netflix management backpedaling, trying to rein in investor enthusiasm, and suggesting that the rapid subscriber gains might come at a price.

A bit of perspective

Back in January, Netflix provided its forecasted growth for the first quarter. It’s worth noting that the company has a pretty impressive track record when it comes to its projections, exceeding its best guess in 11 of the past 16 quarters. Netflix has had difficulty with its second-quarter estimates, which it missed in three of the past four years. 

For Q1, Netflix guided for global streaming paid memberships of 174 million, an increase of about 17% year over year, so the 23% increase to nearly 183 million was somewhat shocking — adding more than double the seven million customer additions it anticipated.

Netflix management is cautioning that the growth had to come from somewhere, insisting that it was likely pulled forward from later in the year, resulting in slower growth looking ahead.

Tugging at the reins

Michael Morris, analyst for Guggenheim Securities, hosted Netflix’s video conference call to discuss the results and asked CEO Reed Hastings for “key indicators … as you try to plan for the business going forward.”

Looking ahead, Hastings said that like everyone, the company is dealing with a great deal of uncertainty, in the face of this unprecedented health crisis. Regarding forward-looking subscriber estimates, he said:

We’ve had an increase in subscriber growth in March. It’s essentially a pull forward of the rest of the year. So our guess is that subs will be light in Q3 and Q4 relative to prior years because of that. But we don’t use the words guess and guesswork lightly … will Internet entertainment be more and more important over the next five years? Nothing has changed in that.

CFO Spencer Neumann echoed the uncertainty voiced by Hastings. When asked about the economic effects of the global pandemic, he cited previous downturns as a guide (emphasis mine):

[In] past recessions, folks tend to spend more time at home and with home entertainment. It’s why they watch their budget in those times, and pay-TV over decades has been more resilient and a bit counter-cyclical in that way. And even Netflix in recent history has been more resilient. But this is very different. We haven’t lived through anything like this. So it’s so hard to tell.

The actual forecast

For the upcoming second quarter (which kicked off at the beginning of April), Netflix is guiding for global subscriber additions of 7.5 million — less than half the first quarter totals — an increase of about 26% year over year, bringing the tally to more than 190 million customers worldwide.

In the shareholder letter, the streaming giant was quick to point out that “progress against the virus will allow governments to lift the home confinement soon. As that happens, we expect viewing and growth to decline … The actual Q2 numbers could end up well below or well above [our estimates], depending on many factors including when people can go back to their social lives in various countries and how much people take a break from television after the lockdown.”

All in all, this seems like a cautionary message to Netflix investors — while the subscriber gains are no doubt impressive, future growth certainly won’t remain at this lofty level.

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Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Netflix. The Motley Fool has a disclosure policy.