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Has Netflix Hit The Ceiling on Subscribers?

The streamer recently stalled out around 222 million subscribers, but it still has eyes on the world.

Netflix  (NFLX) - Get Netflix, Inc. Report has a bit of a problem, as it seems to have stalled out in terms of adding new subscribers.

Last week, its stock price dropped 22%, erasing $50 billion worth of value after a weaker than expected subscriber growth forecast.

Now, having 222 million subscribers is nothing to sneeze at, as it’s more than double its nearest competitor Disney+ and, as noted, “almost double the size of the U.S. cable market at its peak.” You don’t need to worry about the company going out of business or anything. This is not a Blockbuster video situation, but all is not rosy either.

Why Is Netflix’s Stock Dropping?

Netflix's problem is that the company has now hit the point where there is a widespread speculation that it may have hit its natural ceiling. That happens sometimes.

In a system where there’s intense pressure to keep growing quarter after quarter, this isn’t the sort of news that would make the company or investors happy. But at some point, you just run out of potential customers. The best you might hope for, perhaps, is to keep the subscriber base happy and to put out the sort of pop-culture hits that attract lapsed subscribers or the people that will sign up for a month at a time to check out the latest hit before quitting again, which the industry refers to as a churn rate

Two years into the pandemic, more than a decade after the streaming service launched, and after several years of break-out, water-cooler hits like “Stranger Things” and a phenomenon of teenagers mainlining “Friends” and “The Office,” is there anyone left who might consider signing up for Netflix? 

To be clear, Netflix is doing fine. It had a huge third quarter hit with the Korean import “Squid Game,” and the Adam McKay Netflix film “Don’t Look Up” was a trending topic on Twitter for weeks near the end of December.

Netflix acquisitions like Jane Campion’s “The Power of the Dog” and Maggie Gyllenhaal’s “The Lost Daughter” might not bring in “Tiger King” numbers, but they keep a certain type of subscriber happy and bring in Oscar buzz, which is always nice. Subscriber growth is always paramount, but Netflix isn’t going to stop until one of its films finally wins an Oscar. Everyone likes a little prestige, after all. 

Netflix’s main headache at the moment is that the company was one of those which benefited greatly from the pandemic and the resulting quarantine, as plenty of people who hadn’t gotten around to singing up for the service suddenly found themselves with time on their hands.

While the pandemic isn’t really over by any scientific metric, we might be seeing what some call the end of the “Pandemic Boom” as companies like Netflix and Peloton are seeing their value start to plummet as inflation is causing people to make some tough choices about their spending. Also, as John Lynch, the chief investment officer at Comerica Wealth Management told New York Magazine, “Everybody already has Netflix. Who else is gonna get it?”

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Netflix’s To Adopt A Slow And Steady Model?

While analysts like Lynch think Netflix has reached everyone it can get, the company strongly disagrees, apparently.

In a fourth quarter earnings call from last week, Spencer Neumann, Netflix’s chief financial officer, called the recent growth “a little shy,” but insisted that on the whole “business was healthy. Retention was strong. Churn was down. Viewing was up,” while ultimately conceding “we didn't grow acquisition quite as fast as we would have liked to see.”

Though Ted Sarandos, Netflix’s co-chief executive officer and chief content officer, touted the company’s recent gains in the Korean market, with “numbers I would have never believed three years ago,  100% growth in 2021 over 2020.”

Reed Hastings, Netflix’s co-chief executive officer, acknowledged that the company has been facing more competition than ever, while also noting that it’s had rivals such as Hulu  (CCZ) - Get Comcast Corp. Report and Amazon  (AMZN) - Get Amazon.com, Inc. Report for 14 years. He still thinks the company can continue to grow, as he thinks that all of entertainment is becoming streaming in one or another. 

But later in the call an interviewer from Fidelity Investments mentioned that Netflix has talked about how there’s “800 million to 900 million homes globally outside of China,” and the company is only ”25% penetrated into that…how might you actually evolve your content strategy or your pricing strategy to get the next 200 million subscribers?”

It’s a good question, and not one with an easy answer. In the short term, the Netflix executives pointed to upcoming projects like the second season of “Bridgerton,” as well as upcoming films by Judd Apatow, called “The Bubble,” and the Ryan Reynolds film “Our Name Is Adam,” with plans for more superhero and unscripted content in the future. 

But the longer term strategy for the company seems to be a concerted effort to temper everyone’s expectations.

While the pandemic boom was great for the company, Hastings acknowledged that it’s not the kind of high a company can plan for or replicate. Once it wears off, Netflix will have to return to an unsexy but sustainable pattern of slow growth over time. In other words, time to go back to what worked and take the long view.

“Two years ago, we were 10 million above plan, which was a shock, you know? Last year, we were 10 million below or 9 million. And so, you know, the pull forward sort of makes it hard to read,” Hastings said. “In the prior years, we were very steady, so we can have confidence on incremental trends.

"It's possible that we'll get there,” he added, “but slower than we thought. But we're still focused on the original thesis of if we become incredibly compelling, everyone's going to want to be a Netflix member.”