The streaming service is clearly seeing enough of an increasing softening in its domestic subscriber growth to worry investors, which explains why its stock plummeted 20% in the trading session following its 3Q report last year. But while diminished returns in its U.S. sub base is a trend unlikely to reverse, 4Q may not be as bad as the preceding quarter, either.
First, expect Netflix to have gone conservative on guidance this time around after overpromising in 3Q, when domestic subs came in approximately 300,000 below the nearly 1 million that were counted for the quarter. It’s bad enough Netflix suffered from a comparison to the 1.3 million that came in the third quarter of 2013, but being off 27% on its guidance in October added insult to injury.
For 4Q, Netflix is predicting 1.85 million subs in the U.S. and 2.15 million across the 50 countries where the streaming service is active overseas. Projecting going from 53 million total subs to roughly 57 million may seem bullish coming after depressed numbers in 3Q, but the last three months of the year are Netflix’s high season. Not only does the holiday season mean a lot more connected devices that could potentially expand Netflix’s footprint were unwrapped, but Netflix also seems to spend more on advertising itself this time of year.
Even internationally, Netflix may be playing down expectations considering that 4Q may be the first quarter in which the company will see the benefit of its expansion in Western Europe, which had barely begun by the time the company reported earnings in 3Q.
If history is any guide, Netflix is not going to end the year on a low note. The last two 4Qs delivered record stock surges for Netflix, particularly in 2013 when a 42% increase delivered the biggest market-share gain for the company in a decade.
Nevertheless, it’s unlikely 4Q will trigger a surge anywhere as big as past years considering U.S. sub growth will still underwhelm Wall Street–just perhaps not as dramatically as it did in 3Q. Growth has been softening for the past seven quarters, and gotten considerably worse over the last two. Even if Netflix hits its guidance numbers, it will still mean a 21% drop in domestic growth.
If Netflix sees its international numbers explode, expect Netflix execs to try and keep the focus there but smart investors won’t turn a blind eye to the U.S. considering domestic contribution profits are what’s funding overseas expansion.
Netflix CEO Reed Hastings put the blame for 3Q on the higher pricing the company recently instituted. Another bad quarter may draw pointed fingers from outside the company at the launch of its latest original series, “Marco Polo,” which didn’t seem to generate the buzz of “House of Cards” or “Orange is the New Black.”
While the conventional wisdom in the media might be that “Marco Polo” is an expensive dud, that’s not necessarily a wise conclusion to make in the absence of any ratings information. Amorphous “buzz” tends to be used as a substitute metric but quantifying what that is, or its value to adding subs even if it could be quantified, is questionable.