By Therese Poletti
The streaming giant Netflix Inc. has been maturing into a slower-growth company for more than a year, but executives now appear to be recognizing that fact and changing the company in response.
A disappointing outlook delivered Thursday afternoon demonstrated what many investors have realized and this column has previously pointed out — Netflix’s /zigman2/quotes/202353025/composite NFLX +2.60% staggering growth years are behind it. While Wall Street seemed to be shocked, sending shares down nearly 20% in after-hours trading, the past year-plus should have prepared investors for this change.
After a huge surge in sign-ups at the beginning of the COVID-19 pandemic, Netflix has struggled to keep that pace going as competition from the likes of Walt Disney Co. /zigman2/quotes/203410047/composite DIS -0.65% , Apple Inc. /zigman2/quotes/202934861/composite AAPL +0.22% and other streaming services has grown stronger. For the first time Thursday, Netflix executives acknowledged that increased competition from other, newer streaming services has had some impact on its growth, in a regular section of its quarterly letter to shareholders that had so far avoided such statements.
“Consumers have always had many choices when it comes to their entertainment time — competition that has only intensified over the last 24 months as entertainment companies all around the world develop their own streaming offering,” Netflix executives wrote in the letter. “While this added competition may be affecting our marginal growth some, we continue to grow in every country and region in which these new streaming alternatives have launched.”
While Co-Chief Executive Reed Hastings backtracked a bit on that statement in an analyst interview Thursday afternoon — contending that “it doesn’t feel like any quantitative change” because that the company has been competing with Amazon.com /zigman2/quotes/210331248/composite AMZN -0.66% and Disney-owned Hulu for 14 years — Netflix has been signaling this change for a while. The company has been talking much more about engaging and retaining its subscribers, and some of its biggest moves — such as jumping into videogames — are seen as more important to keeping subscribers than attracting new ones.
Netflix also increased prices in the U.S. and Canada for the second time during the COVID-19 pandemic earlier this month, as it looks to continue growing revenue despite subscription growth stuttering in its most mature market.
Netflix is showing a new sensibility in other ways as well. Executives announced some important corporate-governance moves Thursday, citing all the things that had pointed to its maturity: Streaming is now an established business, the company is now self-funding its content creation and expects sustained positive free-cash flow, and it has substantially scaled its revenue. The company will be removing any supermajority voting provisions from its bylaws, after rejecting shareholder proposals seeking that change for years, and will enable its shareholders to call special meetings as it moves to a “more standard large-cap governance structure,” executives wrote.
Netflix investors who have been paying attention on MarketWatch have been reading about the company’s gradual maturation and, ultimately, slower growth, and should have been prepared for this moment. For those who want to buy the dip, know that there are more signs of maturity to come, potentially a dividend, though Netflix’s enormous content-creation costs may get in the way for a few more years.
The transition from a growth stock to a more mature stage is always difficult for both companies and investors, and the decline of Netflix’s stock represents the inevitable for one of the most famous growth stocks of the millennium. And in a low-key, backhanded way, Netflix seems to be acknowledging that change.