Shares of Netflix (NFLX 0.96%) were tumbling after its latest earnings report. The streamer added just 4 million subscribers in the first quarter, below its guidance of 6 million, and it forecast just 1 million subscriber additions in the second quarter.

Investors balked at the results, sending the stock down as much as 8.4% on Wednesday, and the report added fuel to the bears' biggest criticism of Netflix: that its growth will fizzle out as it matures and faces increasing competition in streaming from Disney and a slew of other legacy media companies. 

The receptionist at the Netflix office

Image source: Netflix.

Netflix doesn't see it that way, of course. On the earnings call, management dismissed concerns about competition, saying it didn't see anything among its markets indicating that competition was a factor in its slower growth. Instead, Netflix blamed the pull-forward effect of the pandemic, which drove a record 26 million new subscribers to join Netflix in the first half of last year, and the pandemic-induced slowdown in production that left the streaming service with less new content than it would normally have. Management expects subscriber growth to improve in the second half of the year when its content slate will be much stronger. 

Despite that optimism, there are some legitimate reasons to believe Netflix is maturing. Growth is slowing in its biggest market. It added 6.3 million net new subscribers in North America last year, less than 20% of its total subscriber additions, and in the first quarter, it gained just 450,000 new members in North America. Netflix has also been shifting its focus from subscriber growth to profitability as the company said it could now self-fund its growth and it sees operating margin expanding by 3 percentage points annually after reaching 20% this year.

The streamer also authorized a $5 billion share repurchase program, indicating it's exhausting its best options for reinvesting in the business and thinks it's better to return its leftover cash to shareholders.

Is the growth story over?

CEO Reed Hastings faced the growth question head-on in the earnings call when Fidelity's Nidhi Gupta asked if Netflix had plans for a second app, or a follow-up product to keep the growth story going. Here's what Hastings had to say:

Well, you know, YouTube and Facebook and those properties are multibillion [in users], and the internet is only growing. So where we are so fortunate to get to those numbers that you referred to, we're going to be super hungry to double from there going forward, too. So outside of China, I think, pay television peaked about 800 million households. So you know, lots of room, and that was several years ago at that peak, lots of room to grow.

Netflix has already grown to more than 200 million subscribers around the world, but Hastings still sees room for the company to double its subscriber base, and believes there are at least 800 million potential subscribers around the world. Given Netflix's success in the U.S., where more than half of all households are Netflix subscribers, the company still has a long way to go in penetrating market, and that opportunity should only get bigger as internet connectivity improves and Netflix's local content expands.

It's telling that Hastings most often cites YouTube when he's asked about competition. He believes Netflix competes against a wide range of options like video entertainment, video games, social media, and even sleep. Even with all of its success, Netflix still commands less than 10% of viewing time in the U.S., its biggest market, another sign it still has a significant opportunity in front of it.

When asked about competition from Disney, Hastings almost seemed to think it was irrelevant, saying: "You know, probably your reference was to Disney. But our largest competitor for TV viewing time is linear TV, our second largest is YouTube, which is considerably larger than Netflix in viewing time, and Disney is considerably smaller." In other words, Netflix is still a small piece of a giant entertainment pie.

It's fashionable to question Netflix's future every time it misses its subscriber guidance, but it's also a mistake to ignore Hastings, who's been more right than anyone on the evolution of video entertainment over the last 20 years. The streaming industry is still young, and Netflix has a big head start in international markets, which should serve it well as it aims to penetrate giant markets like India.

One quarter, or even two, of weak subscriber growth doesn't mean the growth story is dead.