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Is It the End of Netflix Growth as We Know It?

By Anders Bylund - Apr 24, 2021 at 11:15AM

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I feel fine.

When Netflix (NFLX -0.98%) reported earnings this week, its subscriber growth figures were terrible. Four million net new subscribers in the first quarter may sound like a lot, but management's guidance had called for six million. Furthermore, management's guidance pointed to continued weakness in the third quarter. Netflix shares plunged as much as 8.3% lower the next day and are still trading roughly 15% below January's all-time highs.

Some would say that this is the end of Netflix growth as we know it, but I feel fine. Here's why.

Chart showing Netflix's week-by-week sub growth since 2017.

Image source: Netflix.

The bear case

Critics point to the chart above, claiming that Netflix has run out of rocket fuel. Not only did the company miss its own subscriber growth targets in the first quarter, but the first few weeks of the next reporting period indicate another period of disappointing growth. One million new customers would be the smallest growth figure Netflix has seen in a decade.

The company added just 100,000 net new streamers in the fourth quarter of 2011, which was the second quarter for which Netflix even provided subscriber numbers for the brand-new streaming business. We're looking at the aftermath of the Qwikster mess here, and that's not an event most Netflix investors want to be reminded of.

So I get why the soft customer growth outlook can be scary. However, Netflix has experienced lumpy subscriber growth before and lived to tell the tale.

A woman stands by a chalkboard with a drawing of a cartoonish rocket flying upward.

Image source: Getty Images.

Nothing new under the sun

For example, Netflix added 2.9 million new subscribers in the first quarter of 2012, but management also took time to explain that the summer season should come in below that 14% single-quarter increase. A larger user base amplifies the seasonal patterns of period-by-period growth figures. According to Netflix:

Due to this increased net add quarterly seasonality, Q2 [2012] net adds will be below those of 2010, despite Q2 gross adds following the traditional seasonal pattern, and despite us expecting to match 2010 in annual net additions. ... We see nothing new or particularly concerning this quarter to date in our member viewing, acquisition and retention. All are healthy.

Nine years later, Netflix's global paid subscribers have soared from 24.4 million to 208 million. First-quarter revenues jumped from $870 million (including $320 million for DVD-by-mail plans) to $7.2 billion (less than $50 million from DVD subscribers).

Most importantly, Netflix's split-adjusted stock price has climbed from $12.53 to $505 per share. That's a 3,950% return. The naysayers of 2012 have been proven wrong in the long run to the benefit of patient shareholders.

NFLX Chart

NFLX data by YCharts.

What's next for Netflix?

The situation really hasn't changed except that Netflix is far larger these days. Quarterly subscriber additions can come in significantly above or below expectations for many reasons, including seasonal effects and unforeseen pandemics. The growth trajectory was accelerated by COVID-19 last year only to take a break in the second half of 2020 and early 2021. When the restarted content production slate comes back in full force later this year, it should light new fires under the global growth story.

And the beat goes on. I think it's smart to buy Netflix shares whenever the stock gets a discount from short-term subscriber trends. The real game-changing story here is that digital streaming is here to stay, and Netflix will benefit as the market itself expands over the next decade or two. I wouldn't be surprised if we look back at this drop from 2030 as a fantastic buying opportunity -- just like the market error in 2012.

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