Netflix (NFLX -9.09%) shares were surging after the company released its latest earnings report, and traded up 9.9% after hours Wednesday.
Following a disappointing result in its second-quarter update in July, the streaming champ bounced back with 6.8 million net subscriber additions in the third quarter, nearly matching its own guidance for 7 million new subscribers. Revenue of $5.24 billion was essentially in line with the analyst consensus at $5.25 billion, and the market seemed particularly delighted with the strong bottom-line result -- earnings per share reached $1.47 due to favorable timing of content and marketing spending, beating estimates at $1.05.
While the third-quarter numbers and fourth-quarter guidance were enough to assuage investors nervous about the Apple TV+ and Disney+ launches just weeks away, there were several key data points and comments in management's letter to shareholders that investors should be aware of.
Image source: Netflix.
1. 2019 subscriber growth will be lower than 2018
Netflix has seen its subscriber growth ramp up every year since it launched its stand-alone streaming service. For a while that was due to global expansion, as the company added new territories every year through 2016. But more recently, the strength of its new content and brand has led to accelerating membership growth.
Management had expected 2019 subscriber growth to set another record, but now it appears that won't be the case. Assuming fourth-quarter guidance is accurate, Netflix is set to add 26.7 million new members this year, compared to 28.6 million last year. While that forecast doesn't necessarily mean subscriber growth has peaked, it could spell trouble for the company if subscriber growth continues to decelerate, as the company's revenue growth is ultimately linked to subscriber growth.
2. U.S. subscriber growth is slowing significantly
U.S. subscriber growth has slowed this year due in part to a price hike at the beginning of the year, and the company's sluggish domestic performance is the reason global subscriber growth this year will be below last year's number. Through the first three quarters of the year, Netflix has added just 2.1 million American, subscribers versus 4.1 million a year ago. Management admitted it had seen more subscribers canceling their memberships this year because of the price hike from $11/month to $13/month earlier this year.
While profitability has surged thanks to higher prices, with the company on track for a 13% operating margin this year, the slowing domestic growth indicates that Netflix subscribers are price-sensitive, and the company's ability to raise prices may be limited for a while, especially as several new competitors are set to enter the arena.
3. International content is finding an audience
American investors tend to focus on Netflix's U.S. business -- after all, that's the product they're familiar with. But Netflix has become a global business over the years, and more than 60% of its subscribers and a majority of its revenue now come from international markets.
At this point, nearly all of Netflix's subscriber growth is coming from abroad, so it's especially important that the company produce hits for its audiences outside the U.S.
In its shareholder letter, Netflix gave its most detailed look yet at the success of its international shows. The third season of La Casa de Papel (Money Heist), the Spanish-language thriller, garnered 44 million viewing households in its first four weeks, a record for a non-English-language show on the platform. By comparison, Season 3 of Stranger Things brought in 64 million viewers, a record for that show.
Management also said that the newest season of Sintonia was the second-most watched first season for a Brazilian show, and it had its biggest hit in Japan with The Naked Director.
Netflix has plans for 130 seasons of local-language TV next year, a record by far and a sign the company sees its ability to target local audiences as a competitive advantage.
4. The fourth-quarter movie slate is stacked
Netflix viewers will also have plenty of Oscar bait to enjoy this quarter. The most-hyped of the titles is The Irishman, the Martin Scorsese-directed drama that cost Netflix $159 million and stars Robert DeNiro, Al Pacino, and Joe Pesci. It's already a frontrunner for Best Picture.
Two other movies have also sparked Oscar buzz. There's Marriage Story, starring Scarlett Johannson and Adam Driver and directed by Noah Baumbach, which gets a 99% rating on Rotten Tomatoes, and The Two Popes, starring Anthony Hopkins and Jonathan Pryce.
In addition, Netflix is bringing Eddie Murphy back to the screen with Dolemite is my Name, and is now screening The Laundromat in theaters, which features Oscar-decorated actors Meryl Streep and Gary Oldman.
Those highly anticipated releases should help Netflix keep subscribers hooked at a time when Apple and Disney will be enticing them to join their services, set to launch in November.
5. Competition is coming, but don't overreact
Netflix regularly addresses competition in its quarterly shareholder letters, but this time it devoted a considerable amount of ink because of the intensifying environment. Management acknowledged that new competition could present challenges in the near term, saying:
While the new competitors have some great titles (especially catalog titles), none have the variety, diversity and quality of new original programming that we are producing around the world. The launch of these new services will be noisy. There may be some modest headwind to our near-term growth, and we have tried to factor that into our guidance. In the long-term, though, we expect we'll continue to grow nicely given the strength of our service and the large market opportunity.
Netflix's fourth-quarter guidance accounted for the launch of competing services, with the forecast calling for subscriber growth of 600,000, an unusually low number for the seasonally strong holiday quarter. However, management continued to argue that linear TV represents the biggest opportunity in television, and that multiple streaming services could grow by taking share from broadcast networks.
That theory will be put to the test like never before in the coming weeks. After the latest report and the stock's bounce, however, Netflix investors appear to be feeling confident in the streaming leader's position.
