Please ensure Javascript is enabled for purposes of website accessibility

1 Reason Netflix Will Beat Subscriber Expectations Again This Quarter

By Adam Levy – Jun 19, 2020 at 11:00AM

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 saw a lot of sign ups last quarter. This quarter, they're sticking around.

Netflix (NFLX 1.39%) blew away expectations for net subscriber additions in the first quarter. Instead of the 7 million new accounts management expected to add, it ended up with 15.7 million.

To be sure, the coronavirus pandemic and stay-at-home orders fueled sign ups for Netflix. Management even warned investors not to get too excited. "Intuitively, the person who didn't join Netflix during the entire confinement is not likely to join soon after the confinement." And management said it expects subscriber additions to come in lighter in the second half of the year compared to last year.

While lockdown orders continued through the second quarter, with many governments cautiously allowing businesses to reopen in May and June, there's a bigger factor at play that could lead Netflix to outperform its expectations to add 7.5 million net subscribers: Fewer people are cancelling their subscriptions.

Research from SunTrust Robinson Humphrey analyst Matthew Thornton shows a decline in searches for "cancel Netflix" as well as promising app download data from Sensor Tower. Both indicate lower subscriber churn, which ultimately supports strong net additions.

A couple laying in bed watching TV.

Image source: Netflix

Churn can be a bigger factor for Netflix than gross additions

Netflix had 183 million subscribers at the end of the first quarter. Keeping those subscribers happy and paying month after month can have a massive impact on its total subscriber count. A 10 basis point (0.1 percentage points) improvement in monthly churn translates into over half-a-million net subscribers per quarter for Netflix.

Lower churn can be especially impactful in the United States and Canada (UCAN), and other mature markets where gross additions are harder to come by. In the second quarter last year, Netflix lost 130,000 subscribers in the UCAN region. Management blamed the subscriber losses on lower gross additions. It subsequently saw fewer than expected net subscriber additions in the U.S. in the second half of the year before admitting competition from companies like Disney (DIS -0.75%) may be having an impact on its results, noting "slightly elevated churn."

The competition from other media companies is only getting stronger. Disney launched Disney+ in Europe and in India at the end of March and in early April. AT&T launched HBO Max in the U.S. at the end of May. Being able to keep churn low through those launches should help Netflix beat net subscriber addition estimates.

Uncertainty ahead

While Thornton's research shows cancellation rates have been low for the last few months, there's still a lot of uncertainty ahead for Netflix.

Netflix is facing a tough third quarter with no big tentpole releases on the schedule. It released Stranger Things season 3 in July last year, but the next season didn't start filming until earlier this year, and it's been delayed due to COVID-19. Meanwhile, post-production may be taking longer than before in the new social-distancing environment, so the third quarter may have a dearth of original content available for release. Combined with warmer weather, restaurants and stores reopening, and new competition, Netflix may not see churn levels remain low through the third quarter.

Investors will want to keep an eye on Netflix's release schedule for the rest of the year. A lack of noteworthy new series or films may be a bad sign. That said, you never know when Netflix could release the next Tiger King. It's capable of producing surprise hits and blowing up their popularity thanks to its expansive reach and the ultimate marketing tool: the Netflix home screen.

Adam Levy owns shares of Walt Disney. The Motley Fool owns shares of and recommends Netflix and Walt Disney and recommends the following options: long January 2021 $60 calls on Walt Disney and short July 2020 $115 calls on Walt Disney. 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.
$240.02 (1.39%) $3.29
The Walt Disney Company Stock Quote
The Walt Disney Company
$100.04 (-0.75%) $0.76

*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
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 10/07/2022.

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.