Once upon a time, in April 2022, Netflix faced a significant setback as it reported a loss of 200,000 subscribers. The streaming giant forecasted an additional loss of 2 million subscribers for the second quarter of that year, a number that turned out to be around 1 million when the actual results were revealed three months later.
These losses sent shockwaves through the media landscape, and their reverberations are still being felt today. Investors became wary of the subscription streaming business, and competitors like Disney and Warner Bros. Discovery began to emphasize profitability over subscriber growth. Netflix’s shares plummeted by about 60% in the following months. At some point, this shift in sentiment among media executives and journalists became known as the “Great Netflix Correction.”
However, it seems those challenging days are now behind Netflix. The company’s third-quarter results have firmly closed that chapter and ushered in a new era of growth. Bolstered by a global crackdown on password sharing and the introduction of an advertising-supported tier priced at $6.99 per month in the U.S. (a 55% discount compared to its standard plan), Netflix added nearly 8.8 million subscribers in the quarter. This figure exceeded Wall Street’s estimates and marked the most significant quarterly increase since the second quarter of 2020 when Netflix gained 10 million subscribers during the early days of the Covid-19 pandemic.
Looking ahead, Netflix is forecasting that subscriber growth in the next quarter will be similar to the second quarter, plus or minus “a few million.”
“The biggest surprise to me is the subscriber growth outlook through the fourth quarter,” said Mark Mahaney, an analyst from Evercore ISI.
For much of 2022, it seemed like Netflix needed a new growth narrative. The company launched a video game service and tried to shift investor focus away from subscriber growth. In November, it unveiled its more affordable advertising tier—a product aimed at attracting users who had traditionally shared passwords and paid nothing.
“We are increasingly focused on revenue as our primary top-line metric,” Netflix stated in its 2022 third-quarter earnings shareholder letter. “This will become particularly important heading into 2023 as we develop new revenue streams like advertising and paid sharing, where membership is just one component of our revenue growth.”
Netflix’s revenue did increase by nearly 8% to $8.54 billion for the quarter. The company anticipates that revenue will leap by 11% in the fourth quarter, reaching $8.69 billion.
It turns out that membership growth has indeed returned, and investors once again see Netflix as a growth opportunity. After hours, the company’s shares jumped by 12%.
This isn’t to say that Netflix has entirely erased the memory of the “Great Netflix Correction” from history. Even with the surge in shares after-hours, they are still trading at around $390, a significant drop from the $690-per-share level reached in October 2021.
Nevertheless, it’s now evident that Netflix has embarked on a new chapter. The runway for growth in the coming quarters due to the password-sharing crackdown remains uncertain. Netflix had previously estimated that around 100 million households share passwords, but it’s still unclear how many of these users will decide to subscribe to their accounts and for how long.
While it may be too early to declare victory, it’s certainly not premature to say that Netflix has managed to avoid defeat.
