Netflix Will Probably Miss Its Subscriber Forecast Next Week, and That’s OK

Forecasting subscriber growth, Netflix's (NASDAQ: NFLX) core expansion metric, is tricky business. Even armed as it is with mountains of internal usage data, the company is usually wildly off the mark from the predictions it issues to investors in the early weeks of a given quarter.

CEO Reed Hastings and his team say that this guidance represents their best guess at membership gains. In other words, rather than setting a conservative goal that they can easily beat, executives aim for accuracy so that they'll undershoot the target about as often as they overshoot it.

Despite that balanced approach, Netflix shareholders haven't yet endured two consecutive quarters of surprisingly weak subscriber growth. That's one possible outcome from the streaming video giant's earnings results that are set to publish on Tuesday, Oct. 16.

In any case, investors should expect actual results to vary significantly from the company's forecast, issued in mid-July, of 5 million global streamer additions.

Often wrong and too pessimistic

Out of the last 10 quarterly reports stretching back to the beginning of 2016, Netflix hasn't once hit the actual membership number. Its closest result came in early 2017, when subscriber gains were 5 million after the company projected 5.2 million.

Hastings and his team have missed forecasts by 800,000 users, on average, over that period. Their biggest whiff was in the second quarter of last year, when Netflix added 2 million more subscribers than expected, with actual results at 5.2 million, or 63% above the target of 3.2 million.

Quarter

Forecast

Actual

Absolute Difference

Percentage Difference

2016 Q1

6.1

6.7

0.6

10%

2016 Q2

2.5

1.7

-0.8

-32%

2016 Q3

2.3

3.6

1.3

57%

2016 Q4

5.2

7.1

1.9

37%

2017 Q1

5.2

5.0

-0.2

-4%

2017 Q2

3.2

5.2

2.0

63%

2017 Q3

4.4

5.3

0.9

20%

2017 Q4

6.3

8.3

2.0

32%

2018 Q1

6.4

7.4

1.0

16%

2018 Q2

6.2

5.2

-1.0

-16%

The company's biggest downside miss occurred last quarter, when actual figures came in 1 million lower than expected. However, the broader forecasting posture has clearly been too pessimistic. Since early 2017, Netflix has outperformed management's predicted subscriber numbers by 7.7 million, or about 16% of the total forecasted growth. That figure helps summarize why the broader business story has been one of significant -- and surprisingly strong -- growth.

Your guess is as good as mine

Many factors drive actual figures away from the forecasted results. These include, on the plus side, hit content releases -- like Stranger Things -- that lifted subscriber acquisition numbers in the past. On the negative side, price hikes have temporarily boosted cancellations at times. Last quarter, Hastings said acquisition figures were a bit lower than expected in what he called a "strong but not stellar" outing for the business.

Netflix's 5-million-subscriber growth prediction for the third quarter seems conservative because it would represent a rare slowdown from the 5.3 million membership boost it achieved in the prior-year period. That plus the company's generally pessimistic forecasting approach would imply that next week's actual results might be a bit higher than predicted.

Meanwhile, Netflix has much better visibility into its sales and profitability trends, and those figures are at least as important to the business. Management's predictions there illustrate just how bullish they are about their growth potential. Streaming revenue should jump by 36% to just under $4 billion, executives believe, as operating margin rises to 10.5% from 7% a year earlier. Those steadily expanding top and bottom lines paint a clearer growth picture than you might get by just focusing on the volatility and noise tied to Netflix's short-term subscriber outlooks.

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Demitrios Kalogeropoulos owns shares of Netflix. The Motley Fool owns shares of and recommends Netflix. The Motley Fool has a disclosure policy.