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Netflix: Fewer Subscribers? No Problem. Here is Why

Netflix’s subscriber base has been growing timidly so far in 2021. Gain of scale and pull-forward in 2020 help to explain why – none of which should worry investors.

In July, Netflix released its second quarter results, and Netflix stock declined in the days following the earnings report. One of the reasons for bearishness was the slowdown in the growth of the platform's subscribers.

However, many analysts agree that this would be either a temporary effect or an expected scenario, given the size of the company. Therefore, while share price has dipped due to short-term concerns, investors with a long-term perspective may see a buying opportunity here.

Figure 1: Netflix app.

Figure 1: Netflix app.

Growing, but more slowly

Netflix ended the period with more than 209 million paid subscriptions. In the second half, 1.5 million paid subscribers were added, more than expected and a little ahead of the company's own forecasts of around 1.0 million. The number still represented the smallest quarterly increase in subscribers since 2013, when the company was a fraction of its current size.

According to Netflix, the pandemic has created instability in subscription growth and distorted year-over-year comparisons. The better news is that retention, for example, continues to be strong and higher than pre-COVID levels, even though average revenue per member has increased by around 8% in the two years. Also, as new content is released and features are added to the service, Netflix can afford to charge subscribers a little more.

Figure 2: NFLX weekly global paid net adds year-to-date.

Figure 2: NFLX weekly global paid net adds year-to-date.

Perspectives for the future

For third quarter 2021, Netflix projects net adds of paid subscribers of 3.5 million versus 2.2 million in the prior-year period. If this projection is achieved, the company will have added 54 million subscriptions in the last 24 months, which is consistent with the pre-COVID annual rate.

However, this two-year period includes the large increase in subscribers at the onset of the pandemic. Netflix's guidance for 3.5 million paid net adds this quarter compares to 6.8 million in the third quarter of 2019 and 6.1 million in the third quarter of 2018. This strongly suggests that Netflix's growth is slower in comparison to 2018 and 2019 – and Netflix can no longer blame the lack of new content for its slower growth.

Shareholders should not worry

Lower subscriber growth was already expected for a company the size and market share of Netflix, which is present in most North American homes and many in Europe. But as the company continues to increase profits and its average ticket per customer, margins should hold and earnings should improve.

Netflix is ​​expected to continue to grow in the coming years, albeit at a slower pace. And for that, the company has been investing heavily in exclusive content and new strategies (such as game creation). Taking advantage of Netflix stock's decline in light of the release of the latest report could be a good opportunity for patient investors.

(Disclaimers: this is not investment advice. The author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content. Thanks for supporting the MavenFlix)