Netflix (NFLX 4.17%) recently reported that season four of Stranger Things broke new records in hours watched for English-language TV on the service. Members spent 335 million hours immersing themselves in the strange things happening in Hawkins, Indiana, during the first week after launch, the company said. It also created interest in prior seasons of the hit series, with the first season reaching 75 million hours viewed.
It's just one show on a service with over 200 million subscribers, but after the stock tanked following a disappointing earnings report in April, Netflix can use any bit of positive news at this point. The company shocked investors by reporting a subscriber loss of 200,000 in the first quarter.
The positive response to the latest season of Stranger Things is good news, but there are a few reasons investors shouldn't expect the company to report a subscriber gain next quarter.
Netflix needs more hits to move the needle
The first factor we should consider is management's guidance for the second quarter that calls for another subscriber loss -- this time, 2 million. Management's outlook likely factored in pent-up demand to see the latest entry in the series, since fans have had to wait three years since season three. Netflix also would have factored in strong expected viewership for other popular shows released in the quarter, including season four of Ozark. Given that management strives to be accurate in its outlook, investors should take the second-quarter guidance at face value.
Another factor to consider is that Netflix is a much larger platform than it was four years ago. Because of its already wide audience, major new releases probably won't have the same impact on growth as they did before.
In the fourth quarter of 2017, following the launch of season two of Stranger Things, Netflix reported a subscriber net gain of 8.3 million, the highest in company history up to that point. After releasing Squid Game in September 2021, which became Netflix's biggest TV show ever, it reported a net gain of 4.4 million subscribers.
As that record shows, there is a declining trend in the impact that popular new releases are having on subscriber growth. Therefore, I wouldn't get my hopes up for Netflix to announce a surprise subscriber gain for the second quarter.
Don't forget the economy
While Netflix's large size and greater competition are two factors making it more difficult to grow than in the past, management also cited macroeconomic headwinds for its weak performance last quarter. This can't be discounted.
New data is emerging that the rising prices for everyday essentials are causing consumers to cut back on subscription services. One estimate shows that 46 million consumers canceled or paused retail subscriptions over the last year, according to The Subscription Commerce Conversion Index by payments-industry intelligence website PYMNTS. Out of a sample of 1,919 respondents, 54% said reducing expenses was the most important reason for dropping their subscription.
With the latest consumer price index data showing the highest 12-month increase since December 1981, this will be a major headwind for Netflix in the near term. But it also means that investors shouldn't interpret subscriber growth in 2022 to be the new normal over the long term.
Given the challenging economic environment it is operating in, Netflix can grow subscribers faster than its recent performance suggests. As management emphasized in the first-quarter earnings report, over half of the world's broadband homes still don't have a Netflix subscription even while smart-TV penetration continues to grow rapidly worldwide.
Perhaps by the time the next season of Squid Game launches (the next entry in the popular series was just given the green light), Netflix can start to resume net subscriber gains. Given the streamer's large content library and a healthy operating profit margin of 20%, the market might be selling the company's long-term value too short after the steep drop in the share price.
