Why Netflix Stock Sank Today
What happened
Shares of video streaming star Netflix (NASDAQ: NFLX) dimmed a bit Thursday afternoon, losing 3.8% through 2:25 p.m. ET after Bloomberg reported that subscriber growth from a Netflix crackdown on password sharing may be starting to run out of steam.
So what
Citing data from market analyst Antenna, Bloomberg estimated that Netflix added 2.6 million new subscriber accounts in July. (Bloomberg noted that this number is not exact, but that the data Antenna collects has proven a "reliable proxy for user growth" at Netflix.)
Now, this sounds like good news. Indeed, it certainly is good news relative to every other streaming provider in the U.S., which Antenna data show all grew more slowly than Netflix. The problem is that, while Netflix added subscribers in July, it added 26% fewer subscribers than it added in June.
Now what
The upshot of this report, therefore, seems to be that Netflix had a good-size pool of potential customers who were borrowing access to Netflix's streaming services by using passwords shared by other, paying subscribers. A lot of these borrowers signed up for their own Netflix accounts in June when the company got serious about cracking down on password sharing. A few million more caved and got their own accounts in July, but fewer caved in July than in June.
This suggests that Netflix is already quickly draining its pool of potential borrowers-turned-customers and will need to find itself a new growth driver pretty soon if it intends to continue growing its user base.
The good news? Adding subscribers isn't the only way for Netflix to grow profits. Turns out a good 23% of subscribers added in July signed up for the company's ad-supported service, which not only costs less than an ordinary Netflix plan but also brings in more revenue than the ordinary plan thanks to advertising.
If Netflix wants to keep growing its profits once the supply of new subscribers runs out, it probably needs to encourage this trend.
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Rich Smith has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Netflix. The Motley Fool has a disclosure policy.
