Netflix Beats Low Subscriber Guidance

Netflix NFLX reported decent third-quarter results as subscriber growth beat the low guidance issued a quarter ago. While management expects to add 8.5 million net new customers during the fourth quarter, this mark would only be in line with last year’s fourth quarter and below the previous two years. We think the lower subscriber growth reflects not only saturation in its largest markets but strong competition in the regions with the most potential growth remaining, including Latin America and India. We are maintaining our narrow moat and raising our fair value estimate to $275 from $250 to account for slightly stronger margin expansion expectations due to lower marketing costs.

Netflix posted 4.4 million net subscriber adds during the quarter versus guidance of 3.5 million, ending the quarter with more than 213 million global paid subscribers, up only 2% sequentially and up 9% from 195 million a year ago. Growth was slower in the U.S., with fewer than 100,000 net additions--only the third time below that mark since the start of 2012. Latin America has also seen anemic growth in 2021, with only 330,000 net adds in the quarter and only 1.45 million year to date, which is well below the same periods in 2019 (3.3 million) and 2018 (4.4 million).

Revenue of $7.5 billion, up 16%, was in line with our estimate. U.S. revenue improved by 11% year over year, largely due to the price hike in 2020 as the subscriber base only increased 1% versus last year. Average revenue per customer for the region was up 10% versus a year ago to $14.68, implying that most customers are on the standard HD plan at $14 with a growing share on the 4K plan at $18. The 4K plan remains the most expensive streaming option in the U.S. marketplace right now, potentially capping Netflix’s ability to continually raise prices as subscriber growth dwindles.

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