Netflix Q1 Review: Streaming’s G.O.A.T. Can’t Afford to Gloat

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Imagine if a company’s biggest problem when reporting quarterly earnings is that investors would get too excited.

That’s the catbird seat Netflix found itself in for Q1 by reporting 15.77 million new subscribers worldwide, more than doubling the company’s own projection for the quarter.

But lest anyone make the mistake of resetting their expectations to believe audience levels have a ghost of a chance of staying anywhere near as high in future quarters, Netflix made it abundantly clear Tuesday that the boost will be short-lived.

Every mention of the subscriber surge in the investor letter was couched to clearly convey how fleeting it was going to be. “Our membership growth has temporarily accelerated due to home confinement” was how the company put it. Projecting for the end of the crisis, Netflix makes clear its own expectation that when it  happens, “we expect viewing and growth to decline.”

Why must Netflix play down an “up” quarter? There’s a few key other reasons to consider.

First, it’s just tone deaf to be too enthused about growth when it’s abundantly clear it’s being driven by market circumstances that while tragic, also happens to be the best thing that ever happened to Netflix. CEO Reed Hastings and other top execs struck just the right, restrained note in their handling of the earnings. To have not demonstrated the proper consciousness of the gravity of what the world is facing right now and been jubilant instead would have played very badly.

Netflix also has to be careful not to appear overconfident because as the company conceded, the good times may not roll for long. Reed Hastings referred to Netflix’s own Q2 subscriber projection (7.5 million) as “guesswork” because without any idea of when shelter-in-place living comes to an end, the audience won’t keep growing at this obscenely high level.

Moreover, there are still potential trouble spots Netflix has to navigate through here. Global Internet bandwidth constraints that the company’s engineers have so far navigated well could conceivably depress usage in some countries if things turn worse. And Netflix made clear that 2020-21 production slate will be largely unaffected, though didn’t quite address whether 2022 or beyond could feel the pain.

Something else that may bring the appearance of Netflix closer to Earth are its subscriber growth rates, a more telling measure of the streamer’s growth (than sheer global net adds) that we noted to pay attention to ahead of today’s earnings call.

Despite the current unprecedented situation helping Netflix more than double the amount of global sub adds it expected to post in Q1 2020, the YoY growth rate of Netflix’s global subscriber base (23%) is decelerating, at least when examined next to the comparable same-period metrics of the past two years. Netflix’s global sub base grew 25% YoY in Q1 2019 and 26% YoY in Q1 2018, for example.  

The relatively lower Q1 2020 growth rate at this point is more of a sign of a maturing company rather than one flaming out, but it’s still worth paying attention to because it can tell a story of growth that sheer subscriber additions may mask. For example, as shown by Netflix’s Q1 2020 earnings results, it’s possible for Netflix to report subscriber additions and beat its own estimates while still experiencing decelerating growth rates, which could in part be attributed to things like new streaming competition.

A different company could have handled its earnings differently and not downplayed the success here so much. Would it be wrong, for instance, for Netflix to message to the industry that the increase accelerated Netflix’s growth curve, or that it encouraged users who may otherwise have not been inclined to subscribe a rare opportunity to make a good impression on a broader marketplace? We think not.

Q1 is ultimately so anomalous for Netflix that it’s going to throw off quarterly compares for years to come. That was also fueled by scoring more than a few big original hits for the quarter.

“Tiger King,” for example, quickly appeared to reach “Bird Box” level fame after it released in late March, at least in terms of meme-ification by consumers. Netflix verified the success of this true crime docuseries in its Q1 2020 shareholder letter, stating that “Tiger King” reached 64 million households within 4 weeks of release. 

Netflix also shared that its Mark Wahlberg-starring original comedy “Spenser Confidential” reached a whopping 85 million households, topping the number that its $150 million December blockbuster original “6 Underground” reached.