Netflix's International Subscriber Growth Blew Domestic Growth Out of the Water in Q3

Netflix (NFLX -0.20%) has been losing some of its U.S. subscribers recently. When the company released its third-quarter results on Oct. 19, investors were curious to see how subscriber growth had shifted during the previous few months. In this segment of Backstage Pass, recorded on Oct. 19, Fool contributors Neil Patel and Brian Withers discuss the high and low points from the company's third-quarter earnings report. 

Neil Patel: Concerns, I think this is nothing new here. The US market in particular, a lot of people think it's a mature market. The most recent quarter, Netflix added 70,000 subscribers there. In the previous quarter, they actually lost subscribers.

It'll be interesting to see how the company can continue to attract users domestically. Again, the crowded streaming market, large ones like Disney, Amazon Prime, and then smaller ones like you have Discovery, you have Paramount, you have NBC's Peacock.

Then also with the NFL in full swing, you have the NBA starting, a lot of different entertainment options out there for viewers in the evening. Those are some concerns for investors to look out for.

Brian Withers: Can you leave the slide up? I love that you called that the international subscriber growth, which is what, 90% plus of the overall subscriber growth, which is really stellar.

The fact that they're maintaining, U-Can is United States and Canada, the fact that they're maintaining against a surging Disney Plus and other streaming solutions, I think it's positive for as long as Netflix is in the business.

To me, this looks like a great quarter all around, but the fact that they just met expectations and even this 83% earnings per share beat of 83%, that's fantastic. But the market, it's essentially flat after hours. It'll be interesting to see what Netflix does tomorrow after the management call. More shareholders have had a chance to look at the results.

Neil Patel: Just wanted to add about the EPS, so last year, because content production had slowed, Netflix wasn't expensing a lot of their content costs. Sorry, that's not what I'm saying.

I think the EPS varies obviously, like I said, with the production delays and stuff. You're going to have lumpiness with that, especially with last year. I think in the fourth quarter, they're expecting that EPS to be, I don't know, just maybe in the teams growth from Q4 of the previous year.

That's because, like I said, they're really seeing a huge slate of content and then they have to amortize that or expense it in that period that it's released. That starts and that depresses that EPS.

The EPS figure is lumpy, and I think looking at that over the long-term is obviously, will give investors a better signal. But unsurprisingly for Netflix, it's all about the subscriber growth, and so to see them beat on that, I think is a real positive for investors.

Brian Withers: I think this is pretty solid all around. Certainly, the renewed commitment to free cash flow positive is something that shareholders have been waiting for a long, long time.

This transition to that, how they're going to get to free cash flow positive and the lumpiness, I think is something that investors should expect over the next probably couple of quarters until those things straightens out, right?

Neil Patel: Yeah, definitely. It's just a great sign that they felt, not only did they mention that they plan to be sustainably free cash flow positive in 2022. But then this year, in the first quarter of 2021, they already instituted a buyback program.

The confidence that they will continue or that they will sustainably generate free cash flow, they didn't wait on that to happen. They actually announced the share buyback, and so I think that's a good sign.

Brian Withers: Super. The only thing of everything that you showed here that's a bummer is the stock has trailed the market over the last year.

Neil Patel: I think that again, that's probably you can see in the summer months, it was really trailing the S&P 500. I think a lot of that has to do with just the competition in the space. I think that might present investors with an opportunity where the stock has trailed the market.

You heard Disney CEO, I think a couple of weeks ago talk about Disney Plus subscriber numbers are lowering the expectations for that. That plays to Netflix's favor, where you come out with a quarter where you exceed on subscriber numbers. It could be a buying opportunity for investors.

Brian Withers: Fantastic update, Neil. Any final comments to close out Netflix?

Neil Patel: Going back to Squid Game, I think quickly, Netflix came out with that had been created $900 million in value for the company, which I don't think anybody really knows what that means. But just the fact that I think the budget for that was $21 million and I think a lot of the subscriber growth had to do with Squid Game.

We'll see, I think paying attention to the churn in the following quarter, how many of the subscribers are signed up to watch the show, and then will just cancel their membership.

Brian Withers: [laughs]

Neil Patel: We'll see what happens there. But I think Squid Game, there's a potential for future seasons, and then Netflix is already selling merchandise with Squid Game and then it could turn into a video game. There's a lot of monetization in the future, so we'll see what happens there.

Brian Withers: It'll be interesting. Halloween's coming up, we'll see if any of the kids are dressed up in Squid Game.

Neil Patel: Exactly. [laughs]

Brian Withers: [laughs] Awesome. Well, thanks so much.