Netflix (NFLX -0.84%) has transformed the entertainment industry and become one of the best-performing stocks of the last decade along the way. The price for the streaming stock has appreciated by nearly 4,000% over the last 10 years, but today its status as a growth juggernaut looks to be in jeopardy.
Netflix is maturing in its oldest markets, and the law of large numbers is making it harder for the company to grow at the pace it has historically maintained. While Netflix beat estimates in its third-quarter report and issued solid guidance for the current quarter, the report also revealed at least three potential problems for the stock.
1. Revenue growth is slowing
Revenue in Q3 increased by just 16.3% to $7.5 billion, the company's slowest growth rate since 2012. That's partly due to the slowdown that followed the company's boom in the first half of 2020 when the pandemic started and lockdowns around the world led to a surge in sign-ups. Netflix's content slate was also thinner than normal in the first half of 2021 because of COVID-19-related production delays.
However, that's not a full explanation for the company's slowing growth rate, and the company's forecast of 16.1% revenue growth in the current quarter shows that it might never return to the days of 20%-plus revenue growth. Netflix has two ways of growing revenue: It can add subscribers, or it can raise prices. It can only raise prices by so much without driving away subscribers, and growing its subscriber base gets more difficult as it more deeply penetrates its key markets.
2. Subscriber growth is even slower
For the last two quarters, Netflix's subscriber growth has fallen to less than 10%. In Q3, subscribers increased by 9.4% to 213.6 million, and its subscriber base is expected to grow by just 9% in Q4. That means that subscriber growth is driving a little more than half of the company's revenue growth right now with price increases making up for the rest.
The company is on track for just 18.4 million subscriber additions this year, just half of what it added last year in the pandemic-driven surge. Subscriber growth next year will likely be stronger, but growing its base by much more than 10% over the coming year will be difficult.
Netflix's subscriber growth has averaged about 27 million annually over the last five years, but even if it can get back to that point in 2022, that would only increase subscribers by 12%.
3. North American growth is stalling
Netflix has lost subscribers in North America over the last two quarters, the first time that's happened since the Qwikster debacle. Though it added 70,000 subscribers in North America in Q3, that wasn't enough to make up for the loss of 430,000 subscribers in Q2. The summer months are typically slower for the company in its home market, and Netflix raised its prices at the beginning of the year, but that subscriber drop still shows the market is maturing.
The company has already signed up more than half of broadband households in North America, limiting its growth potential. Its average monthly revenue per membership in North America is $14.68, nearly double what it is in Latin America, showing that subscribers in its home market are its most valuable. North America is also its most profitable market, and if the company can't grow there, it will have to make up for it elsewhere.
Why I'm not selling my Netflix stock
Netflix's slowing revenue growth is worth keeping an eye on, but there are reasons that the stock can still outperform even if that slowdown persists. And one of those reasons is that slowing revenue growth comes at the same time as its profitability is exploding. It's targeting a 20% operating margin for the current year and expects that to grow by an average of three percentage points every year, meaning it would reach 29% by 2024.
Netflix is transitioning from a growth story to a profitability one. While the slowdown in revenue growth is concerning, 2021 has been a noisy year as the company laps the boom from the pandemic and deals with the production challenges. 2022 should see a rebound, and that and other potential growth drivers are worth sticking around for.