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

Netflix (NFLX -0.79%) 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.

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.

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.