The growth in subscriber count has been the key reason behind the meteoric rise in Netflix’s market cap over the last decade. Since Netflix has never generated profits and free cash flow on a consistent basis, investors and management alike have focused on the subscriber growth metrics. However, Netflix’s subscriber growth has started to decelerate even before it confronts the competitive threats from giants like Disney and Apple.
In the third quarter of 2019, Netflix added just 6.8 million subscribers worldwide. What’s worse is just 520,000 of those subscribers came from the U.S.—which is the most important market for Netflix—well below the management’s expectation of 800,000. The shortfall came on the back of a plain-bad Q2 performance that saw Netflix lose 123,000 subscribers in the U.S.
Since Netflix has long been valued as a growth stock, the subscriber growth number has always been centric to the company’s story. However, the law of large numbers and onslaught of high-powered competitors has led to a drastic slowdown in subscriber growth rate. As a result, the company’s management appears to be desperate to change the narrative so as to keep the illusion of growth alive.
Speaking at a recent conference, CEO Reed Hastings claimed that ‘the total subscriber viewing time’ is a better way to measure who’s winning the ‘The Streaming Wars’ than total subscribers or rate of subscriber growth. Here’s what Hastings said:
You’ll hear some subscriber numbers, but you can just bundle things, so that’s not going to be that relevant. So the real measurement will be time — how do consumers vote with their evenings? What mix of all the services do they end up watching?
The conveniently-timed comments made are a continuation of his prior commentary on ratings and subscriber metrics.
For a growth company like Netflix, concentrating on the subscriber growth tally is logical since more paying users equal more revenue and profits. Focusing on the total viewing time, on the other hand, makes no sense at all. Since Netflix charges its users by the subscriber and not by the hour, the total viewing time metric is not that vital for people looking to invest in the company. And it surely isn’t more important than the subscriber totals as Hastings is trying to suggest.
It is understandable why Hastings is trying to shift the goalpost. As a big holder of Netflix stock, Hastings has an incentive to keep the stock price propped up for as long as possible while he dumps his shares onto the retail investors. The recent trades of Netflix insiders clearly indicate that even the company’s management doesn’t really believe in Hastings’ new rhetoric.
As evident from the image above, over the last 12 months, there has only been one insider buy as opposed to 20 sells. In addition, the number of shares bought by the sole insider was a measly 6,499. In comparison, the number of shares sold was 931,862.
Netflix is roughly down 30% from its 52-week high and the company insiders have been net sellers of over 925,000 shares in this period. Hastings’ attempt to change the narrative may be able to keep the stock price up for a short duration; however, it won’t be too long before reality catches up.
Netflix’s future outlook looks bleak. The subscriber growth tally is expected to take a turn for the worse with the arrival of multiple competitors that will not only have as big a content library as Netflix, but will also be much cheaper.
Netflix charges its users $12.99 for a monthly subscription. For the same amount, consumers can get a bundle of Disney+, ESPN+, and Hulu or they can opt for Amazon’s Prime Video for $10 per month.
Netflix is operating in a highly-crowded space and has no significant price or other competitive advantages. While Netflix’s management suggests that the dynamics of the online streaming industry is poised for significant change with Netflix is well-positioned to capitalize on it, the numbers suggest otherwise.