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What investors should make of Netflix’s earnings

eMarketer Forecasting Analyst Eric Haggstrom joins The Final Round panel to break down Netflix’s earnings, how the company is faring compared to its competition and if the streaming giant will raise its prices.

Video Transcript

SEANA SMITH: Welcome back to "The Final Round." Netflix here is in focus with the stock off just around 5% after hours. Ines Ferre joins us with a closer look at the report. Ines.

INES FERRE: And, Seana, a subscriber addition that did not meet Wall Street expectations with Netflix saying that it added 2.2 million subscribers in the third quarter. That's below what the Street had been expecting. The Street had been expecting more than 3 million.

Its adjusted earnings per share came in at $1.74. That also came in below Street estimates, though revenue did come in as a beat, coming in at $6.44 billion, Seana.

SEANA SMITH: Ines, thanks. Well, for more on this, we want to bring in Eric Haggstrom. He's eMarketer Forecasting Analyst. And, Eric, great to have you. Clearly the stock under a bit of pressure. Investors are a little bit concerned about the subscriber growth number that we got. The company also falling short, like Ines just said, on its earnings per share during the quarter. Exceeded, though, revenue. I guess just overall big picture, what's your takeaway from this report?

ERIC HAGGSTROM: Well, this came in more or less as expected. Netflix has been messaging that their first half was fantastic, that they added a ton of new subscribers, just about as much as they added all of last year, and that the back half of the year would be a lot more lumpy in terms of subscriber additions.

Now, their guidance of about 2.5 million was missed. But again, they only missed it by about 300,000 subscribers, which given that they're closing in on 200 million worldwide subscribers, is relatively small.

Long term, this doesn't really change the whole trajectory of, you know, Netflix. They are growing. They are still growing subscribers across all of their regions. But again, growth will be slower in many of their major markets, namely the United States where well over half of all US households already subscribe to Netflix, and even more have access to the service via password sharing.

AKIKO FUJITA: So, Eric, we're talking about slowing growth in the US, which potentially points to saturation point, but interesting numbers out of Asia here. APAC region seeing a 66% growth in revenue year on year. You know, Netflix for a while has been talking about the potential outside of the US, that they have more subscribers outside of the US. I mean, how much-- to what extent do you think that region can sort of pick up the slack in the face of a slowing growth in the US?

ERIC HAGGSTROM: Well, it's certainly picked up the slack over the past couple of quarters and will continue to pick up the slack moving forward. When you look at penetration in various countries in APAC, whether you're talking about India or Indonesia or South Korea or Japan, they just don't have the same adoption that they have in any of these other markets, so there is a huge amount of room for them to continue to grow.

Now, they've been making investments in original content for a while, but again, it takes a while to create content, and those investments are going to pay off not maybe this year but certainly next year as growth should continue to be very strong.

SEANA SMITH: Now, Eric, another big question going forward is just where it stands with competition. We've talked about this increase in competition here over the last several months-- really over the last couple of years. And it's interesting because in this press release we saw Netflix say that they are thrilled to be competing with Disney and a growing number of other players here in the streaming space. How big of a headwind or a challenge, do you think, increased competition could be? I mean, does it risk stifling some growth here for Netflix in the future?

ERIC HAGGSTROM: Well, I think competition really is going to impact their pricing power in the market. Netflix has really strong pricing power in many of their developed markets. But again, this does put a bit of a headwind in terms of how much you can raise the price moving forward, especially given that, you know, you're reaching some sort of saturation with subscribers in many of their major markets at least.

But all the new competition isn't full in on streaming. You can look at what Disney's been doing. You can look at what Warner Media's been doing. And it's very difficult for these legacy media companies and major media companies in general to shift their entire business model to streaming.

Now, movie theaters have been closed. There haven't been sports on TV, at least not to the same degree as a normal year. So these companies are struggling, and streaming is a bright spot for them. But again, it's not quite-- they're not quite in direct competition with Netflix given, you know, the release schedules and all that.

I mean, Disney+ has had some major releases, but in the past year you can point really to "Mandalorian," "Hamilton," and maybe one or two other releases that have been major hits, whereas Netflix has had consistent releases every single week.

JEN ROGERS: Based on your research and what we know of Netflix talking about engagement, what does it take--

[ECHOING VOICES]

--where-- I have no idea what that noise is. But what would it take for people to cancel Netflix do you think?

ERIC HAGGSTROM: Well, you know, we saw this "Cuties" controversy recently where there was some elevated churn. But in general, I don't think that there's much that's going to make people cancel Netflix en masse at the moment.

When you start looking to all the options that you have for entertainment and have had for entertainment over the past five years, Netflix has continued to show growth and has continued to increase prices. And really, they've kept their subscribers.

When you look at Netflix in particular, you can cancel your subscription anytime. So the fact that they've been able to grow to, you know, well over 60 million subscribers in the US and almost 200 million subscribers worldwide is really a testament to just showing how well they've been able to keep subscribers and, you know, delight their subscribers.

AKIKO FUJITA: Eric, there's been a lot of debate about just what the cap is for the average user, how many subscriptions they're willing to hold in terms of streaming services. Have you seen that shift during the pandemic because so much so many of us are spending so much time at home? There's no theaters. There's no other entertainment. Are you finding that users are maybe willing to add one more service onto the number of streaming sites that they already subscribe to?

ERIC HAGGSTROM: Yeah, so I think that's an interesting question, and I think ultimately the question is a little flawed right now given that so many streaming services are being bundled in with other, you know, subscriptions. So you get Amazon Prime Video for free with your Amazon Prime, you know, two-day delivery service. You get HBO Max for free if you have certain AT&T wireless services. Disney, Hulu, and ESPN+ are now being bundled in with select Verizon plans, and the list goes on and on how these, you know, services are being bundled together.

So I think there certainly is a cap in terms of how many subscriptions an individual person is willing to pay for, but, you know, it's really uncapped in terms of how many subscriptions they'll have access to so long as these subscriptions help drive, you know, other business models-- so so long as Amazon Prime Video helps Amazon sell more socks, so long as all these other services help drive other parts of their business. I mean, if HBO Max can help AT&T both increase ARPU on their, you know, wireless plans and also reduce churn, that can have huge knock-on effects for the rest of their business.

SEANA SMITH: Eric Haggstrom, eMarketer forecasting analyst, thanks so much for joining us.