Netflix Falls Short of Q3 Subscriber Estimates, Stock Drops 6%

Streaming giant added 2.2 million new subscribers, about 300,000 less than the company had projected

Last Updated: October 20, 2020 @ 1:50 PM

Netflix’s push towards 200 million global customers hit a speed bump during the third quarter, with the streaming giant reporting Tuesday it added 2.2 million subscribers during Q3 — falling short of both the company’s estimates as well as projections from Wall Street analysts.

The company had estimated it would add 2.5 million subscribers back in July, saying it expected growth to slow down after it had added about 26 million new subscribers during the first half of the year. Analysts had estimated the company would add somewhere between 3 and 3.3 million new subscribers.

“As we expected, growth has slowed with 2.2m paid net adds in Q3 vs. 6.8m in Q3 [2019],” Netflix said in its letter to shareholders. “We think this is primarily due to our record first half results and the pull-forward effect we described in our April and July letters. In the first nine months of 2020, we added 28.1m paid memberships, which exceeds the 27.8m that we added for all of 2019. In these challenging times, we’re dedicated to serving our members.”

Overall, Netflix now has 195.1 million subscribers.

Revenue of $6.44 billion narrowly surpassed analyst expectations of $6.38 billion, while its earnings per share of $1.74 fell short of the $2.14 EPS analysts were looking for.

A few minutes after the report came out, Netflix’s stock was down 6.6% in after-hours trading to $490 per share.

Netflix’s free cash flow was positive for the third straight quarter, with $1.1 billion FCF comparing to a loss of $551 million during the same time period last year.

Heading into Tuesday, there was a debate over whether Netflix’s subscriber count would take a hit, due to the blowback against “Cuties.” Last month, a#CancelNetflix hashtag jumped to the top of Twitter’s trending section as some users complained the French film, which had just hit the service, depicted a hyper-sexualized view of minors and promoted pedophilia. The hashtag gained momentum after a scene from the film, showing young girls dancing in a suggestive manner in front of adult spectators, was shared on Twitter.

The furor continued this month when Netflix was indicted by a grand jury in a Texas county district court over claims the French film promotes “lewd visual material” depicting a child. Netflix defended “Cuties” in a statement afterward, saying it is “a social commentary against the sexualization of young children. This charge is without merit and we stand by the film.” As TheWrap reported last week, one analyst for Bank of America noted a “short-lived but potentially stark” uptick in domestic churn rate for Netflix in September, but that a jump in cancellations outside the U.S. had not been seen.

On Tuesday,  Netflix reported its domestic subscriber base edged up from 72.9 million to 73.08 million customers.

A number of other shows and movies hit Netflix during Q3, including: “Ratched,” the fifth season of “Lucifer,” “The Social Dilemma,” and the first two seasons of “Cobra Kai,” which had previously been a YouTube original.

Q3 also marked the first quarter in which Netflix was led by two captains, after longtime Chief Content Officer Ted Sarandos was elevated to co-CEO in July alongside Reed Hastings.

“Ted has been my partner for decades. This change makes formal what was already informal — that Ted and I share the leadership of Netflix,” Hastings said at the time.

Moving forward, Netflix projected it’ll add 6 million subscribers during Q4. That would put the company at 34 million new customers on the year, topping the company’s record of 28.6 million subscribers added in 2018.

“The state of the pandemic and its impact continues to make projections very uncertain, but as the world hopefully recovers in 2021, we would expect that our growth will revert back to levels similar to pre-COVID,” the company said in its letter to shareholders.