Monday, September 27, 2021

1 Number You Missed From Netflix‘s Earnings

Netflix (NASDAQ:NFLX) recently announced mixed financial results for the second quarter of 2021. Revenue of $7.34 billion and subscriber growth of 1.5 million exceeded Wall Street analyst and internal  estimates, while earnings per share of $2.97 disappointed. 

It’s clear that the coronavirus pandemic has caused lumpiness in Netflix‘s membership numbers, especially following a monster year in 2020. People went from being stuck inside their homes to now returning to some level of normalcy, and there is still some near-term uncertainty. 

While it’s best not to focus too much on any one quarter, there was a key statistic that really stood out. Read on to find out what impact, if any, this metric has on Netflix‘s stock. 

Startled person watching tv.

Image source: Getty Images.

Trouble stateside 

As the leader in streaming entertainment now with more than 209 million  subscribers worldwide, Netflix is a dominant force in the new media landscape. But the company’s expansion in the U.S and Canada (UCAN), a region that accounts for roughly 35% of customers, turned negative in the most recent quarter. 

Netflix lost 430,000 paying members in this geographic segment in Q2 2021 compared to Q1 2021. Although management blames  an already large subscriber base in the two developed countries, as well as the second quarter usually being the softest period of the year, it’s still noteworthy for shareholders. 

As competition in this space continues heating up with the arrival of newer rivals, investors are wondering just where Netflix‘s growth will come from. It’s increasingly looking like international markets will be the answer. In the three-month period ended June 30, the Asia-Pacific region contributed two-thirds  of net subscriber additions. This will probably be the norm going forward. 

But let me calm any investor worries about the declining UCAN number. First of all, management actually expected a decline based on the reasons I mentioned above (an already large customer base and a traditionally weak quarter). Second, this isn’t the first time a drop has occurred. In Q2 2019, Netflix‘s U.S. service lost 130,000 subscribers. In the two years since, the UCAN region has added some 7.5 million  members. The slowdown in 2019 was only temporary.

And finally, I think it would be premature to say that the U.S. and Canadian markets have reached their peak. Combined, the two countries had approximately 134 million broadband households in June 2020 (the most recently available data). Not only does this figure continue creeping higher with each passing year, but it also demonstrates the untapped opportunity for Netflix. Obviously, not everyone will be a streaming service user, but with 74 million  customers in the UCAN region today, there is clearly still some room to grow. 

Looking ahead 

I want to reiterate the point that investors should not put too much emphasis on any one particular quarter. The pandemic has impacted consumer behavior in unpredictable ways, leading to wide fluctuations in the near term. 

After a light content slate during the first half of the year due to production disruptions, Netflix expects more releases in the third and fourth quarters as production sets are back to being fully operational. Management is hoping for an uptick in new members, forecasting 3.5 million net adds in Q3. Furthermore, the company is still on track to spend $17 billion on content this year, something its competitors just can’t match. 

If we take a step back, we can easily see that Netflix‘s business is humming along. The company’s massive scale and first-mover advantage give it a huge leg up on other streaming services. Instead of fixating on one quarter’s numbers, it’s best to focus on the bigger picture. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Fintech Zoom premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

1 Number You Missed From Netflix‘s Earnings

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