Please ensure Javascript is enabled for purposes of website accessibility

A Big Sign Netflix's U.S. Subscriber Growth Is Nearly Tapped Out

By Adam Levy – Updated Apr 24, 2020 at 4:32PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Netflix just had a huge quarter for subscriber additions, but the U.S. didn't keep up.

Netflix (NFLX 7.18%) just added more subscribers in one quarter than it did in the first 13 years of its existence. The 15.8 million subscribers the company added in the first quarter far exceeded its original outlook of seven million net additions, due in part to more people staying at home amid the coronavirus pandemic.

While the number of global net additions far exceeds any number Netflix has reported in the past, it's worth noting subscriber additions in the U.S. and Canada region totaled just 2.3 million. That's more than the 1.9 million it added in the first quarter last year, but still less than it added in the first quarter of 2018.

That's a bit surprising, considering that the effect of COVID-19 on streaming engagement and subscriptions has been so pronounced. In his letter to shareholders, CEO Reed Hastings wrote, "Intuitively, the person who didn't join Netflix during the entire confinement is not likely to join soon after the confinement." In other words, subscriber growth in the U.S. and Canada may be tough to come by for the rest of the year.

Exterior of a building with Netflix logo above the door.

Netflix offices in Los Angeles. Image source: Netflix.

Stalling subscriber growth

Netflix released an update to investors at the end of last year to provide some background on its new geographic reporting segments. The company's UCAN region, which stands for the U.S. and Canada, saw a marked slowdown in subscriber additions last year, particularly in the latter three quarters.

The table below shows Netflix's net subscriber additions by quarter for the UCAN region in 2018 and 2019.

Quarter

Q1

Q2

Q3

Q4

2018

2.49 million

0.96 million

1.14 million

1.75 million

2019

1.88 million

-0.13 million

0.61 million

0.55 million

Data source: Netflix 8K filing and letter to shareholders. Table source: Author

One reason for the significant drop in subscriber additions is the price increase that took effect in the United States during the first quarter last year. Management said it saw increased churn as a result, noting price sensitivity around its new price point.

Importantly, Netflix has now lapped that price increase, and management says the churn rate returned to pre-price change levels during the company's first quarter earnings call. How much of that can be attributed to stay-at-home orders and how much can be attributed to lower-value customers churning out last year is unknown. If churn rates go back to the elevated level Netflix saw last year once people are comfortable leaving their homes and socializing, net additions for the second half of 2020 will likely underperform 2019.

A strong U.S. dollar complicates matters

The U.S. dollar, the currency in which Netflix reports its financial results, has seen a surge in price relative to other currencies. That's notable because if Netflix's subscriber growth is coming almost entirely from international markets, revenue growth won't be nearly as robust as in previous years. In fact, despite the huge outperformance on subscriber additions in the first quarter, its revenue came in right in line with its expectations.

With U.S. subscriber growth increasingly difficult to come by, Netflix could see revenue growth severely lag its subscriber growth this year. Not only does it face foreign exchange headwinds, but it's likely not going to raise its price again this year. That's especially true in light of the tough economic environment we now face.

The long-term story is strong

Saturating the U.S. market isn't a bad thing. Netflix has long said it expects to achieve between 60 million and 90 million subscribers in the U.S. As of the end of the first quarter it has 70 million between the U.S. and Canada. Its long-term outlook was spot on, in other words.

The robust growth across all international markets is a sign there's still a lot of growth for Netflix, just not in the U.S. And while it's seeing a big effect from foreign exchange rates right now, Netflix should see its average revenue per subscriber (in U.S. dollars) continue to trend upward over the long run. That said, it's going to be a bumpier ride from here, and investors should expect even more wild swings in its quarterly results going forward.

Adam Levy 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.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Netflix, Inc. Stock Quote
Netflix, Inc.
NFLX
$240.47 (7.18%) $16.11

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
327%
 
S&P 500 Returns
105%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 09/28/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.