Netflix (NFLX -1.74%) pleasantly surprised shareholders when it reported better-than-expected subscriber figures after the markets closed on Tuesday. Nevertheless, the streaming pioneer has experienced two consecutive quarters of subscriber losses amid the economic reopening gaining momentum worldwide.
That was to be expected, though. The company thrived at the pandemic's onset, signing millions of new users looking to make the time cooped-up at home tolerable. But at the same time, the streaming landscape was getting more crowded and more competitive. Understandably, Netflix's growth evened out somewhat following the surge. But investors were worried that the slowdown would be worse, so the better-than-expected subscription figures sent Netflix's shares higher this week.
Netflix surprises shareholders with fewer subscriber losses
In its most recent quarter, which ended on June 30, Netflix shed 970,000 subscribers. That was better than the 2 million subscribers management thought it would lose. Overall, Netflix boasts 221 million subscribers after losing close to 1.2 million over the previous two quarters combined. Thankfully, it expects the trend to reverse in the third quarter when it estimates it will add 1 million subs.
Despite losing customers in the second quarter, Netflix's revenue increased from the previous quarter and year. Sales totaled $7.97 billion in the quarter ended in June. That was up from $7.87 billion in the last quarter and $7.3 billion in the same quarter the prior year. Netflix has implemented price increases across geographies, which could partly explain subscriber losses. The move may cause some customers to cancel their subscriptions. Still, overall, it is revenue-positive for the company because the revenue generated from those paying incrementally higher fees offsets the subscriber losses.
Other factors impacting subscriber growth include rising competition, unauthorized account sharing, and economic reopening. Those are a lot of powerful forces to contend with simultaneously, and the fact that Netflix has only lost 1.2 million members in two quarters could actually be a good sign. To counter some of those pressures, Netflix is introducing a lower-priced ad-supported tier of its service in the early part of next year.
Launching the cheaper option could attract consumers from competitors and retain subscribers who would have otherwise canceled. This strategy makes the company more resilient in the face of a likely recession because customers can move to a lower-priced tier instead of canceling the service altogether.
Netflix's stock is still down considerably off its highs
The market has rewarded Netflix for a good quarter, and the stock is up 6% on the day following the announcement. However, Netflix stock is still down 69% off its highs reached last year. By reporting better-than-expected subscriber figures in Q2 and forecasting a return to growth in Q3, Netflix has alleviated one investor concern, but not all. The headwinds are persisting, fears of a recession in the U.S. are rising, and the company must prove it can execute on new initiatives.
That said, the significantly discounted stock price gives investors an excellent risk versus reward for betting on Netflix to overcome these challenges in the long term.