- Netflix shares surged after hours on stronger-than-expected subscriber gains.
- The quarterly adds, and the company’s projection that next quarter’s gains should be similar, put an end to a period of low or no growth for Netflix.
Netflix is correcting the Great Netflix Correction.
There once was a time, long ago in April 2022, when Netflix reported a loss of 200,000 subscribers. The company forecast it would lose an addition 2 million subscribers in the second quarter that year, a number that ended up being about 1 million when Netflix announced actual results three months later.
The losses sent shockwaves through the media landscape that are still felt today. Investors soured on the subscription streaming business. Rivals such as Disney and Warner Bros. Discovery began publicly championing profitability over subscriber growth. Netflix shares fell about 60% in the coming months. At some point, media executives and journalists started calling the shift in sentiment the Great Netflix Correction.
But those days are now over. Netflix reported third-quarter results that definitively end that chapter, ushering in a new era of growth. Buoyed by a global password sharing crackdown and an advertising-supported tier ($6.99 per month in the U.S.) that’s 55% cheaper than its standard plan, Netflix added nearly 8.8 million subscribers in the quarter, topping Wall Street estimates. That’s more than the company has added in any quarter since the second quarter of 2020, when Netflix gained 10 million subscribers during the early days of the Covid pandemic.
Netflix is also forecasting that subscriber growth next quarter will be similar to the second quarter, plus or minus “a few million.”
“The biggest surprise to me is the subscriber growth outlook through the fourth quarter,” said Evercore ISI analyst Mark Mahaney.
Read more: Netflix is leaning more into sports programming
For much of 2022, it appeared as though Netflix needed a growth narrative. The company launched a video game service and tried to get investors to stop stressing out about subscriber growth. In November, it introduced its cheaper advertising tier — a product Netflix hoped would be appealing for those who had historically shared passwords and paid nothing.
“We are increasingly focused on revenue as our primary top line metric,” Netflix wrote in its 2022 third-quarter earnings shareholder letter. “This will become particularly important heading into 2023 as we develop new revenue streams like advertising and paid sharing, where membership is just one component of our revenue growth.”
Netflix’s revenue did increase — nearly 8% to $8.54 billion for the quarter. The company forecast that revenue will jump 11% in the fourth quarter, reaching $8.69 billion.
It turns out membership growth did, in fact, return. Investors appear to once again view Netflix as a growth opportunity. Shares jumped 12% after hours.
That’s not to say that Netflix is erasing the Great Netflix Correction from history. Even with Wednesday’s after-hours jump, Netflix shares are trading around $390. That’s a far cry from the $690-per-share level reached in October 2021.
Still, it’s now clear that Netflix has entered a new chapter. It’s unclear exactly how long the password sharing crackdown runway is for growth in coming quarters. Netflix previously estimated about 100 million households share passwords, but it’s still unclear how many of these moochers will actually subscribe to accounts of their own — and for how long.
It may be too early to declare victory, but it’s not too early to say Netflix avoided defeat.
WATCH: Netflix’s Q4 subscriber growth outlook is a “big surprise,” says Evercore analyst
Source: Business - cnbc.com
