Last year was challenging for Netflix (NFLX 2.52%). Panic set in for the streaming platform as its growth story looked like it was coming to an end. The company reported an unexpected drop in subscriber numbers, prompting a sell-off of its shares.
And while it did recover from that setback, the company knows that its business isn't growing enough anymore. The pandemic-induced boom is over, there's more competition, and the company is now on the cusp of what could prove to be a risky strategy: cutting down on password sharing.
Netflix needs to improve its growth rate
Netflix knew for ages that people shared passwords, and it didn't care enough to do anything about it. The company was growing fast enough that it didn't matter if people from different households were sharing subscriptions because its numbers were good and rising. But now that the growth rate has come to almost a screeching halt, the priorities have changed.
NFLX revenue (quarterly YoY growth) data by YCharts. YoY = year over year.
This problem has been going on for some time. But last quarter (the last three months of 2022), the growth rate fell to less than 2%. For a stock that trades at 35 times earnings, that simply isn't going to cut it for growth investors.
Trying to squeeze more revenue or get more people to sign up for accounts appears to be an understandable strategy, especially since Netflix estimates 100 million households share passwords.
Why the strategy could be risky
With so many households accustomed to sharing passwords, that is a mammoth number of subscribers that Netflix could potentially alienate. I can understand the approach, and it's not an unreasonable one, especially when people who are not family members share passwords solely to cut down their costs.
NASDAQ: NFLX
Key Data Points
The problem I see is that for a market like Canada, where Netflix has already begun to ask users to set a primary location, the cost for an extra person on a plan is 7.99 Canadian dollars ($5.98) per month.
For people on the standard plan costing CA$16.49 per month, that's effectively a 48% increase in their monthly fee. Given that the basic tier costs CA$9.99, there's just a CA$2 cost advantage for people to continue sharing versus signing up for their own individual account (unless they decide to go to the lower ad-based plan at CA$5.99, where some content is unavailable). But the price of an additional user represents a mammoth increase for a family where everyone doesn't live under the same roof.
With so many similar streaming services for comparable prices, it might entice consumers to simply jump ship to another provider that doesn't have similar restrictions. And if 100 million households are involved (Netflix has just under 231 million subscribers), this could be a dangerous strategy, one that could backfire disastrously in the end.
Is Netflix's stock in trouble?
The smart thing Netflix has done for now is that it's only deploying these crackdowns on password sharing in select countries -- including Canada, New Zealand, Portugal, and Spain. Depending on how users respond to these changes, Netflix could adjust its strategy without affecting the bulk of its subscribers.
But according to data from Alphabet's Google Trends, the early results aren't good. The searches for the term "cancel Netflix" are the highest they have ever been in Canada since Netflix launched its streaming service there in 2010.
It's too early to tell how this will play out, but I would be hesitant to buy Netflix right now because as investors saw last year, even the slightest hint that its growth strategy is no longer working could lead to sharp sell-off.
