Netflix (NFLX +1.98%) is undoubtedly one of the best-performing stocks in the past couple of decades. It has skyrocketed 13,130% since July 2004, on the backs of a successful run at disrupting the media and entertainment landscape.
This top streaming enterprise continues to post stellar financial results, leading to its shares approaching their record high. However, investors looking to scoop up the stock should press pause for a second: Does this one key reporting change mean trouble for investors?
How many subscribers?
After a brief post-pandemic lull, Netflix is firing on all cylinders, thanks to the company's progress at cracking down on password sharing and the successful launch of an ad-supported tier. The membership base was up 16% in Q1 (ended March 31) year over year to nearly 270 million, with revenue rising 14.8% to $9.4 billion.
Profits are also through the roof. Netflix reported operating income of $2.6 billion in the quarter, good for a fantastic margin of 28.1%. This business now generates billions in free cash flow on a yearly basis.
However, executives sent shock waves through the investment community when they said that Netflix would no longer report subscriber numbers starting in 2025. To be fair, though, they did mention that they'd "announce major subscriber milestones" as they hit them.
The management team believes that at this stage of Netflix's life cycle, revenue, operating margin, and engagement are the key performance indicators to gauge the help of the business. Moreover, given the multiple price points and tiers available for consumers, looking at membership figures is not as vital to the story as it once was.
NASDAQ: NFLX
Key Data Points
Two different perspectives
On one hand, shareholders can take the leadership team's reasoning at face value. That's an easy perspective to have. Giving Netflix executives the benefit of the doubt seems like the right move, especially since they've built a global media empire whose share price has outperformed the vast majority of stocks. Maybe they're not trying to cover anything up.
Growing revenue and earnings is probably the most important thing that investors want to see. Whether that comes from signing up more members or from occasional price increases might not matter as much these days.
To be clear, I've been bullish on Netflix. And I still believe the business has a bright future. But I tend to lean more on the critical side of this debate.
If the management team were confident that the business could grow its subscriber base at a healthy clip for the foreseeable future, they would gladly want their shareholders to know about it. So this is a reason to worry a bit. Maybe this is a sign that subscriber growth is going to slow dramatically going forward.
That shouldn't be too much of a surprise. Management estimates that there are currently 500 million smart-TV households worldwide (excluding China, where Netflix isn't available). Converting more of these households to Netflix customers won't be as easy as it was historically. There is so much competition out there. Plus, it will simply require Netflix to have a more convincing content offering to expand its user base over time.
It will create a problem for investors, particularly those who need access to membership data to track the company's performance each period. This is especially true when we're talking about a subscription business. I'm sure that when most active fund managers try to value Netflix, figuring out trends with subscribers is a critical component of the analysis. Now they will have to do some guessing.
While I don't believe this automatically spells doom for Netflix, I believe that investors need to pay even closer attention to the other metrics that matter.
