Netflix Dealt With the Freeloaders. Its Next Act Will Be Tougher.

Netflix’s life on top won’t always be an easy one.

The streaming pioneer managed to deliver another quarter of blockbuster subscriber growth. Net new paid subscribers of 9.3 million in the first quarter were nearly double the official 4.8 million analysts expected, according to consensus estimates from Visible Alpha. They were even above the sky-high whisper number range that several analysts pegged as the real target among large investors tracking the company’s performance. It was yet another sign that the password-sharing crackdown that Netflix began last year still has legs. Netflix has added more than 31 million subscribers over the past three quarters since that program began—more than double what was added in the three quarters prior.

Still, revenue of nearly $9.4 billion for the quarter only barely exceeded Wall Street’s forecast. Netflix also gave its first-ever annual revenue forecast—projecting growth of 13% to 15% for the year—that was only in line with analysts’ views. And in another change, the company announced that it would no longer report subscriber data at all starting next year.

That threw a bit of a wet blanket on a stock that has surged 76% over the past six months—the fourth-best performance on the S&P 500 in that time. Netflix shares slipped nearly 5% in after-hours trading Thursday. “We suspect reduced disclosures may disappoint the Street,” Citigroup’s Jason Bazinet noted following the results.

Netflix has been trying to get investors to focus less on subscriber growth for a while now—and not without some justification. It is a wildly unpredictable number that even the company has struggled to forecast well. It announced in late 2022 that it would no longer provide quarterly subscriber projections, which followed a three-year period where those projections fell short of Wall Street’s consensus forecast in every quarter but one, according to FactSet data. That was also a recipe for a volatile stock; Netflix shares tumbled following most of those reports.

Revenue growth has typically been more steady. It is also—according to Netflix—a better way to measure the performance of a business that now includes several pricing tiers, paid-sharing accounts and advertising. Left unsaid is the idea that a streaming service with nearly 270 million paying members now may struggle to find the same number of untapped viewers in the future. Netflix added more than 100 million new subscribers over the past four years. Are there 100 million left who have so far avoided “Stranger Things,” “Bridgerton” and “Squid Game?”

Still, this shift in emphasis will put new onus on Netflix’s ability to raise prices—or get more viewers into its cheaper but potentially more lucrative advertising tier, which offers higher average revenue per member than many of its ad-free plans. The latter is still a relatively small business; analysts project advertising will make up just 4% of Netflix’s total revenue this year and 7% next year, according to current projections from Visible Alpha.

Fortunately, the company has what still looks like an insurmountable lead among its big media streaming peers, whether in terms of subscribers, earnings or cash flow. Netflix projected an operating margin of 25% this year—a year in which Disney expects to barely get its own streaming operation profitable.

And it is even getting a little help from its foes, as those same media rivals are back to licensing some of their most popular content to Netflix, in return for much-needed cash. The HBO hit series “Sex and the City” hit Netflix this month, and co-Chief Executive Ted Sarandos said on Thursday’s call that “the floodgates have opened a little more on licensing for sure.” Netflix will be the most popular act in streaming for a long while, even if it becomes less clear just how many are watching.

Write to Dan Gallagher at [email protected]