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3 Surprises in Netflix's Strong Quarterly Report

By Rick Munarriz – Oct 20, 2021 at 9:05AM

Key Points

  • Despite a sequential dip in usage, churn hasn't been this healthy at Netflix in years.
  • Latin America is experiencing some growing pains following a recent price hike, just as the U.S. market is starting to inch higher again.
  • Netflix won't be buying its way into gaming growth.

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The leading premium video service found a way to mix things up this week.

There were some pretty lofty expectations heading into Netflix's (NFLX -1.12%) financial update on Tuesday afternoon. The leading premium video service was able to check off most of the boxes that it needed to impress Wall Street.

The stock didn't initially move higher on the news. The shares hitting new highs earlier this month made it hard for even a blowout performance to keep the gains coming. However, there were still a few welcome surprises in the report. Let's check some of them out.

Two people watching something scary on TV.

Image source: Getty Images.

1. Churn is actually improving

There were a of lot gems in the quarterly shareholder letter, but one of the more interesting nuggets came out during the subsequent earnings call. Netflix says churn is down from previous years. 

It's a pretty big deal. There have never been as many worthy rivals on the streaming front. Competitors are ripping pages out of the Netflix playbook calling for proprietary content, and one would think that churn would actually be climbing in this climate. Who has time to subscribe to every platform, when it's so easy to cancel and just rotate the disposable income around?

Netflix did concede viewership levels per member dipped relative to the pandemic-battered 2020. This isn't a surprise. We've seen engagement suffer now that folks feel safer going out of the home for entertainment. It makes the decline in churn even more impressive. Folks may be spending less time streaming right now, but they are clinging to their Netflix subscriptions because they know it will continue to crank out culturally relevant hits. 

2. Pricing elasticity isn't forever -- down south

When Netflix bumped prices higher in many markets earlier this year it was easy to wonder when the premium service would cross the line. In the U.S. it has increased its monthly rate by at least a buck five times since 2014, boosting its price 75% in that time. Its domestic subscriber count has always been higher by the time the next hike comes around.

Sometimes there's initial resistance, and we did see a sequential dip in stateside users in the second quarter of this year. It recovered marginally in the third quarter. However, Netflix did mention during its earnings call that price increases in Latin America resulted in slowing growth there. The region represents just 12% of the revenue mix at Netflix, and the average monthly rate is just a little more than half of what U.S. subscribers are paying. Netflix sees the slowdown in Latin America as temporary, but it's a fresh reminder that there are limits even to the pricing power of Netflix. 

3. The game is already afoot

Netflix is moving fast on the gaming initiative it announced just three months ago. It mentioned in its quarterly letter that it's already testing games in select countries. It will learn a lot along the way, and it continues to emphasize that it will not monetize the diversions through ads or in-app purchases. Games will be simply a retention tool for the streaming service, included in the regular subscription price. 

In the earnings call that followed, Netflix provided a little more color. It acquired an indie game developer last month, but it doesn't expect to keep gobbling up other gaming companies. It's making moves now, but it cautions that it will take years before its gaming efforts move the needle at Netflix.

Netflix remains more the leader among streaming service stocks than a rising master of multimedia. Investors can't complain. It's a long game that Netflix is playing to win here.

Rick Munarriz owns shares of Netflix. The Motley Fool owns shares of and recommends Netflix. The Motley Fool has a disclosure policy.

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