Netflix (NASDAQ:NFLX) just had its best second quarter ever, adding over 10 million global subscribers. Subscriber growth was fueled by the coronavirus pandemic, as consumers sought out more home entertainment.

Subscriber numbers exhibited hockey-stick like growth in March and early April, but began to level off by May. By the end of June, Netflix's weekly subscriber net additions chart started moving downward. It actually started losing subscribers.

A woman sitting at a reception desk. Netflix logo on the window.

Image source: Netflix.

A few reasons for the downward trend

The biggest reason for the downward movement in subscriber numbers in June was that Netflix canceled a bunch of accounts of its own accord. The company announced plans to start suspending inactive accounts at the end of May.

Netflix said, "These inactive accounts represent less than half of one percent of our overall member base, only a few hundred thousand," during its announcement. Still, that can have quite an impact when they're all lumped into a couple weeks. The impact of future cancellations will be much less noticeable.

The second reason is what Netflix's management has been warning about: It pulled forward a lot of subscriber additions in March and April. Additionally, Netflix didn't have any major new releases last month to attract new subscribers. Its biggest series debuts were the fourth season of 13 Reasons Why and the introduction of Floor Is Lava.

Finally, it's likely Netflix's churn rates started to tick up as the weather improved and outdoor activities became more appealing. The company has historically lower net subscriber additions in the summer months.

That said, fewer subscribers are canceling than last year. "The retention across every cohort is as good or better than pre-COVID," CFO Spence Neumann said during the company's second-quarter earnings call. Indeed, with many vacation plans canceled, churn may remain lower over the summer compared to last year, but it won't stay where it was in March and April.

What it means going forward

Netflix's outlook for just 2.5 million net subscriber additions in the third quarter disappointed a lot of investors in the FAANG stock. But Neumann pointed out that if you combine Q2 results with the third-quarter outlook, it'll produce the best middle half of the year in Netflix's history. And that's the best way for investors to think about its results in the second half of the year.

Expectations that growth will meaningfully accelerate in saturated markets like the U.S. and Canada are unreasonable even with the impact of coronavirus. Netflix added 5.25 million subscribers in the UCAN (United States and Canada) region through the first half of 2020. In 2017 and 2018, it added 5.51 million and 6.33 million, respectively. Subscriber additions notably dropped in 2019 after a price hike.

Investors shouldn't expect significantly more than that 5.5 million to 6.5 million range for subscriber additions in the UCAN region. That means it could have more weeks of negative subscriber growth in the region. The LATAM (Latin America) region should show similar results as it includes many of Netflix's early international markets. But growth in other markets ought to mask results to a certain degree.

Netflix was showing signs of saturation in certain markets before COVID-19, and the fact is that it's even more saturated now than it was in February. Winning over new subscribers won't be as big of a factor going forward in those markets as Netflix's ability to retain the ones it has. To that end, it's unlikely to maintain the subscriber retention levels it saw in the second quarter through the end of the year. 

That said, there's still a lot of growth left for Netflix in some newer markets -- not just from increasing subscribers, but from increasing prices as well.