Netflix: Breaking down how investors interpret subscriber data

Netflix (NFLX) stock is falling Friday morning despite reporting breakout growth of 9.3 million new subscribers in its first-quarter earnings report. Going forward, the streaming giant will not be disclosing subscriber figures in future earnings results.

Citi Managing Director Jason Bazinet sits down with the Morning Brief to highlight the "anxiety" that could manifest in investors from Netflix withholding this core data. Netflix's ad-supported tiers and password-sharing crackdown have proven to be a boon to revenues and the streamer's subscriber count.

"What they [Wall Street] want to see is when we begin to lap some of these password-sharing benefits, what's going to carry the water? How are they going to get these net ads?" Bazinet explains. "So right about the time that the benefit of password sharing fades, people want to see the sub numbers to see how well the ad tier is doing."

For more expert insight and the latest market action, click here to watch this full episode of Morning Brief.

This post was written by Luke Carberry Mogan.

Video transcript

SEANA SMITH: So let's take a look again at shares of Netflix. They're off just about 7%, despite, like Allie was just saying, beating on earnings and subscriber growth.

Now, this is coming after the streaming giant announced that it's no longer going to report quarterly subscriber numbers starting next year. Here's what co-CEO Greg Peters had to say about the decision on the company's earnings call.

GREG PETERS: So this change is really motivated by wanting to focus on what we see are the key metrics that we think matter most to the business. So we're going to report and guide on revenue, on OI, OI margin, net income, EPS, free cash flow.

We'll add a new annual guidance on our revenue range to give you a little bit more of a long-term view. We'll also-- we're not going to be silent on members as well. We'll periodically update when we grow. And we hit certain major milestones, we'll announce those. It's just not going to be part of our regular reporting.

SEANA SMITH: Well, investors clearly spooked by this change. Let's get analyst reaction for that. We want to bring in Jason Bazinet, Citi's managing director.

Jason, it's great to see you. So clearly by the stock reaction, we're looking at shares off just about 7%. The fact, though, that Netflix is no longer going to be reporting the subscriber growth numbers, what does that tell you? What does this signal?

JASON BAZINET: Well, it may signal nothing. But I'll tell you what the Street fears. The stock really worked because the company has been beating net ads. And the Street knows. It's on password sharing. And what they want to see is when we begin to lap some of these password sharing benefits, what's going to carry the water? How are they going to get these net ads?

So right about the time that the benefit of password sharing fades, people want to see the sub-number to see how well the ad tier is doing. And now, Netflix isn't going to give the sub-number. So that's why there's so much anxiety.

It implies to someone that there isn't really a natural transition to continue sub growth.

BRAD SMITH: And so with that in mind, there's also going to be a thought for a lot of investors about the pricing power, because this is a company that's, over years, exhibited some of that pricing power, whether regionally that then gets pushed more internationally. Do you think that they still have a firm pricing power that they're able to insert into the market, and, then, ultimately, get more margin out of?

JASON BAZINET: Yeah. They probably do. They do have pricing power. But think what the market wants to see, at least, what they were most animated about, is the potential aggregate revenue that they would report with the ad tier, because the ad tier was supposed to-- while the consumer paid, less the aggregate revenue the company would generate with ads was more.

And so if we're not going to be getting subs and, therefore, not ARPPU, it brings into question, well, maybe the monetization on the advertising side of those ad tier subs isn't going to be as healthy.

SEANA SMITH: Jason, where do you think things stand? Is this specifically about questions, in particular, to Netflix's business? Or does this also point to maybe some concerns more broadly speaking within the streaming industry?

JASON BAZINET: Well, no. I don't think that there's big issues in the streaming industry. I would say that everyone else on the traditional media side is facing a very different situation. They're just trying to get losses down to zero to demonstrate they can break even.

What Netflix is really doing is trying to widen the distance between itself and rivals. And I would say, one other thing that happened on the call that was important qualitatively is a lot of bulls on the street were expecting content spending to be flat going forward at $17.5 billion.

The company said, no. We're going to continue to increase content spending a little bit less than revenue growth. But it will go up. And when you saw the stock up at $620 a share, the buy side began to poke on levers in their model that could get them more upside. And that was one of the main things.

What if content spending is flat? We get more free cash flow, stock goes higher, and they just poured cold water on that.

BRAD SMITH: What type of content spending would you like to see them do? Is it international content? Is it sports content, where there's a highly competitive market for some of those rights coming up too?

JASON BAZINET: So I get some pushback on this thesis. Because I've covered traditional media for so long, I know that a global piece of content is very hard to find. If you really want to deepen penetration, deepen engagement in Germany and Italy, and South Korea, and Brazil, it has to be local.

And so a lot of what I think the company is grappling with, whether it's their video game push, or maybe sports push, is trying to find some piece of content that scales globally. And when you get that, you're starting to move away from scripted content towards alternatives, like, video games and sports.

And that seems to be where the company's opening the door to doing something along those two new vectors.