Netflix Inc. added more than 2 million subscribers in the third quarter after stumbling into 2022 with two consecutive quarterly subscriber declines, a rebound that sent shares more than 15% higher in after-hours trading Tuesday. Shares were up about 11.5% in premarket trades early Wednesday.
Netflix NFLX, +13.09% reported a net gain of 2.41 million subscribers in the third quarter, while analysts on average were forecasting 1.1 million net additions, according to FactSet. That follows a decline of roughly 200,000 subscribers in the first quarter and nearly a million in the second quarter, which has led the company to plan massive changes, including a cheaper, ad-supported streaming tier set to arrive in the fourth quarter.
In a letter to shareholders, Netflix executives said they expect 4.5 million new subscribers to join in the fourth quarter, with revenue forecast to grow to $7.78 billion from $7.71 billion a year ago. Analysts on average were estimating revenue of $7.97 billion and a net subscriber gain of 4 million for the fourth quarter, according to FactSet.
After a challenging first half, we believe we’re on a path to reaccelerate growth,” executives wrote in the letter.
“Thank God we’re done with shrinking quarters,” Netflix co–Chief Executive Reed Hastings joked of core subscriber growth during a video interview late Tuesday. He deemed the next two quarters a welcome relief but just a start. Ted Sarandos, Hastings’s fellow co-CEO, noted the popularity of “Stranger Things” Season 4 and its recent Jeffrey Dahmer series.
The news sent Netflix shares up about 15% in after-hours trading following the release of the results, after closing with a 1.7% drop at $240.86. The stretch of subscriber declines has filleted Netflix shares, which have swooned 60% so far this year while the broader S&P 500 index SPX, -0.67% has declined 22.8%.
The streaming-video giant’s downturn after a pandemic-boosted surge has only intensified pressure from rival streaming services at Walt Disney Co. DIS, +0.52%, Apple Inc. AAPL, +0.08%, Amazon.com Inc. AMZN, -1.11%, Warner Bros. Discovery Inc. WBD, -2.10%, Comcast Corp. CMCSA, -1.17% and Paramount Global PARA, -2.60%.
That didn’t stop Netflix executives from taking a pot shot at streaming rivals over profitability. “Our competitors are investing heavily to drive subscribers and engagement, but building a large, successful streaming business is hard — we estimate they are all losing money, with combined 2022 operating losses well over $10 billion, vs. Netflix’s $5 [billion] to $6 billion annual operating profit,” Netflix executives said in the shareholder letter.
Netflix Chief Financial Officer Spencer Neumann said the company would remain in the $17 billion “zip code” for content spending this year.
A dramatic shift in the video-streaming climate, one in which Disney surpassed Netflix as market leader in July, has prompted a radical makeover at Netflix. Last week, the company announced its long-awaited advertising-supported tier, which debuts Nov. 3 in the U.S. for $6.99 a month. Another 11 countries, including Canada and Mexico, will get the service by Nov. 10. [The dozen countries account for more than half of Netflix’s total revenue.] The company has also vowed a crackdown on shared accounts, and is pushing forward on gaming. On Tuesday at the TechCrunch Disrupt conference, Netflix vice president of game development Mike Verdu said the company is considering a cloud-gaming service.
The advertising-supported tier directly acknowledges competition and the necessity of Netflix “adapting to the streaming landscape’s new normal,” Insider Intelligence analyst Ross Benes said in a note late Tuesday
Netflix announced third-quarter earnings of $1.4 billion, or $3.10 a share, down from $3.16 a share a year ago. Netflix revenue improved to $7.93 billion in the quarter from $7.48 billion in the same period a year ago, but missed diminished expectations. Analysts polled by FactSet expected earnings of $2.14 a share on sales of $7.84 billion, estimates that had dipped in recent days.
Tuesday’s results follow some serious self-reflection among Netflix executives on how to stanch a decline in visits among subscribers that has led to cancellations. Co-CEO Hastings has consulted with staff to find ways to make subscribers visit the platform more frequently, according to reports by The Wall Street Journal and Bloomberg News.