Oct 21, 2020

Netflix Subscriber Growth Slows Rapidly, Ending Lockdown's Rapid Growth; Stock Price Drops Nearly 7

Netflix's pandemic momentum is waning. After a remarkable first half of the year, the streaming giant failed to meet several of its goals for the third quarter.

The company gained 2.2 million paying subscribers worldwide from July through September, falling short of analysts' estimates of more than 3.3 million and its own projections of 2.5 million. Sales of $6.44 billion were slightly above expectations, but net income of $790 million was below expectations of $954 million. The stock price fell nearly 7% today.

In the first two quarters of the year, Netflix gained 26 million new subscribers. The company's leaders claimed on their earnings call (see below) that this new subscriber acquisition led to a slowdown in the third quarter. The company noted its high customer retention rate and estimated that it will gain a total of 34 million subscribers in 2020, which would be a record for the company.

For the first time this quarter, Asia Pacific showed the highest growth with 1 million new subscribers. The U.S. and Canada had only 180,000 subscribers, suggesting that Netflix is approaching market saturation in this region.

Despite slower than expected growth, Netflix is still well ahead of its competitors in the streaming arena, boasting more than 195 million paying customers worldwide; Disney+ has 60.5 million subscribers, while AT&T's HBO and HBO Max had 30, 6.3 million at the end of the second quarter. Netflix's stock price is up more than 60% this year, while Disney's is down nearly 15%. The company recently announced a reorganization focused on streaming.

There is another important context: after years of borrowing billions of dollars annually, Netflix is approaching the point where it can fund its own content. According to the shareholder letter, "With $8.4 billion in cash on its balance sheet at the end of the quarter and an additional $750 million in [unused] credit facilities, the need for outside financing has diminished. Once the company is able to self-finance, new levels of growth will be possible.