Netflix (NFLX -1.12%) reported its third-quarter results last week, and on the whole, it posted solid numbers. Revenue matched the company's guidance at $7.48 billion. Meanwhile, earnings per share reached a record $3.19, smashing the company's forecast of $2.55 and the analyst consensus of $2.56.
Even subscriber growth exceeded management's expectations by approximately 880,000 paid net additions. Nevertheless, it remains clear that Netflix's growth is slowing -- and that doesn't leave much long-term upside for Netflix stock.
More signs of a growth slowdown in the Americas
Netflix grew its paid streaming subscriber base by 4.38 million members last quarter, beating its initial forecast of 3.5 million paid net additions. A year ago, the company reported just 2.2 million paid net additions in the third quarter, due to the COVID-19 pandemic pulling growth forward into the first half of 2020.
However, while Netflix reported a solid result for global subscriber gains, its growth rate varied widely between regions. In the Americas, subscriber growth has slowed considerably compared to a few years ago.
Today, slightly more than half of Netflix's subscribers live in the U.S., Canada, or Latin America. Yet across those regions, Netflix added just 400,000 net paid memberships last quarter, representing a mere 9% of its subscriber growth. Over the past 12 months, the streaming media giant has added 3.61 million subscribers in these markets, growing its subscriber base in the Americas by 3.3%.
How long can Europe continue its robust growth?
With subscriber gains slowing in Netflix's oldest markets, Europe has emerged as the biggest driver of its recent growth. Over the past year, Netflix has added 8.26 million paid subscribers in Europe, the Middle East, and Africa, accounting for 45% of its paid net additions for that period.
Netflix ended the third quarter with 70.5 million paid subscribers in its EMEA region: up 13% year over year. At the beginning of 2018 -- less than four years ago -- Netflix had just 26 million subscribers in the EMEA region.
If Netflix can continue expanding its EMEA subscriber base at a double-digit rate for a few more years while gradually increasing prices in the region, it would go a long way toward making up for slowing growth in the Americas. Indeed, EMEA is on pace to surpass the U.S. and Canada as Netflix's largest region by subscriber count within a quarter or two.
However, while EMEA has more broadband households than the U.S. and Canada, Netflix may start to saturate the market within a couple of years. When it does, growth could slow quite abruptly. In the U.S. and Canada, paid subscriber growth moderated from 11% in 2018 to around 5% in 2019. The growth pace has continued to average around 5% since the beginning of 2020, albeit with heavy pandemic-induced volatility.
What about Asia?
With growth already moderating in the Americas and likely to follow suit in the EMEA region before long, Netflix could soon find itself leaning heavily on its Asia-Pacific region to drive subscriber increases. This is the one region that Netflix is nowhere close to saturating yet.
Netflix's Asia-Pacific region user base has surged from 6.5 million subscribers at the beginning of 2018 to over 30 million today, including a 28% increase over the past 12 months. But while there's plenty of room for further growth, developing countries with low household incomes account for much of the long-term opportunity. Netflix could reach market saturation in developed countries like Australia, Japan, and South Korea by the middle of the decade.
In developing countries, Netflix may need to offer significantly lower prices, reducing the value of each subscriber. For example, in 2019, the company began testing a mobile-only subscription plan in India for the equivalent of $2.80 per month: a fraction of the prices it charges in most markets.
Investors may be expecting too much
Every growth business matures sooner or later. Slowing growth by itself doesn't necessarily doom an investment. However, management has been giving investors an overly rosy view of future growth trends this year, helping drive Netflix stock to all-time highs this month.
If the projected subscriber growth and revenue growth don't materialize, Netflix will struggle to live up to its lofty valuation. I don't foresee any huge wipeout for Netflix stock, but as growth slows over the next few years, multiple compression could offset higher earnings, preventing the shares from making meaningful long-term gains.