Netflix Misses on Q3 Customer Adds

Subscriber growth at Netflix NFLX in third quarter came in below our estimate and management’s forecast. The firm likely pulled some growth forward during the first half of 2020, though we suspect increased competition in the U.S. also played a role. Despite the miss on subscriber additions, revenue was in line with our projections for the quarter. We still expect the global rollout of Disney+ and the recent launches of Peacock and HBO Max to increase churn and pressure customer growth over the next year. We are maintaining our narrow moat rating and $200 fair value estimate.

Netflix added 2.2 million net new customers, including only 180,000 in the U.S. and Canada (UCAN), versus guidance of 2.5 million. The firm no longer provides expectations for both domestic and international net additions. Netflix ended the quarter with more than 195 million global paid subscribers, up from 158 million a year ago. The growth slowdown in the quarter was spread across the four global regions, with each well behind their numbers from a year ago. Asia-Pacific was the only region to post more than 1 million customer additions in the quarter as the region remains least penetrated for Netflix.

Revenue of $6.4 billion was in line with our estimate considering the firm’s increasing overseas presence exposes it to currency fluctuations. UCAN revenue improved 12% year over year as the firm benefited from the 2019 price hike and a larger subscriber base. Monthly revenue per customer was up 2% versus a year ago to $13.40 which implies that the majority of the customer base is on the standard HD plan at $12.99, with a growing share on the 4K plan at $15.99. While Netflix did recently push through a price hike in Canada, we don’t see much room for price increases in the U.S. in the near term with increased competition at lower prices. However, given the weak net adds in the quarter and continual content cost increases, Netflix may be tempted to increase prices despite potential churn impact.

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