Investors pressed pause Netflix (NFLX 3.55%) Stocks that have lost a whopping 69% in 2022. Negative sentiment on the business, particularly with a loss of 200,000 subscribers in the first quarter and expectations of losing another 2 million in the current quarter, has been scarcely more memorable of late.
For a company that has been successful for most of the last decade, shareholders now fear that its days of rapid growth may be drawing to a close popular streaming stock. For what it’s worth, I believe Netflix still has a huge opportunity ahead of it. It just won’t be as easy as it has been, adding to the uncertainty.
Let’s take a closer look at whether Netflix’s growth is really over.
The US and Canada appear saturated
In the first three months of 2022, Netflix lost 640,000 members in the UCAN region (US and Canada). With each passing quarter, it looks more and more like this market has reached a plateau in terms of net new customer additions.
As of March 31, Netflix had 74.6 million memberships on UCAN, with an additional 30 million households that management believes share passwords. Taken together, these 105 million households are close to the 116 million cable television households in the two countries at the industry’s peak in 2010.
Even more alarming is the higher-than-expected churn Netflix saw in the UCAN region during the first quarter. This trend supports the argument that the pricing power of the companya key element of his investment thesis, may actually be weakening.
On the plus side, however, is the company’s announced plan to launch a cheaper, ad-supported subscription tier should help to attract price-sensitive customers. And at the same time, it could turn password-sharing accounts into paying households.
International markets will drive growth
While growth could stall in Netflix’s two most developed countries, the U.S. and Canada, expansion into foreign markets will be a key driver for the business as we look forward. In the Asia Pacific (APAC) region, Netflix currently has 33.7 million subscriptions and generated 11.7% of its $7.9 billion total revenue in the first quarter. APAC is not only Netflix’s least penetrated market, but it was also the only region to see membership growth last quarter.
In India, a country expected to have 653 million internet users this year, Netflix is aggressively trying to attract new customers. The company recently reduced prices there to keep up better Amazon Prime Video and Walt Disneyis hot star. Growth can certainly come from lower-income countries where Netflix only offers mobile plans, but revenue opportunities will definitely be limited compared to the wealthier UCAN, for example.
There are currently around 750 million (and counting) broadband subscriptions worldwide (excluding China where Netflix is not available). Assuming the company can achieve the level of market penetration it has with UCAN in other markets around the world, it’s easy to see Netflix’s current membership base of 221.6 million growing significantly.
It will not be easy
To be clear, none of this is going to be easy. For most of the past decade, Netflix has been the best and only streaming option available. This lack of competition meant the company attracted customers simply by offering a better user experience than traditional cable TV. However, with viewers now having an endless array of choices, Netflix needs to find other ways to differentiate itself.
That means continuing to spend big on content to produce the best movies, documentaries, and shows. In times of loose monetary policy, low interest rates and low inflation, this was not a difficult task. But in today’s economic environment, it can be expensive for Netflix to bid on and partner with the top producers and writers, especially other well-funded competitors targeting the same talent and content deals.
Hence Netflix operating marginwhich has increased by three percentage points annually in recent years, will remain unchanged at around 19% to 20% in 2022 and 2023. And while the company’s long-awaited goal of generating positive free cash flow is still on the table as of this year, shareholders won’t be pleased if membership numbers don’t increase.
Reed Hastings and his team have a history of demonstrating their tremendous ability to change course and turn around when higher growth rates become difficult. So it’s hard to bet against this management team. Still I think There is a better way for investors to play on the ongoing secular trend of streaming entertainment.