Has Netflix’s value gone well beyond subscriber growth?

In a shock to Wall Street, Netflix plans to stop reporting quarterly subscriber numbers starting in 2025, believing the metric has lost its relevance in assessing the health of a platform.

Netflix’s stock performance has long been linked to the gain or loss of subscribers.

In a letter to shareholders, along with the first quarter earnings figures, the streamer king sought to reorient investors towards time-spent metrics, where it offers more potential in the coming years. Netflix’s decision to prioritize profits, revenue and free cash flow over subscriber numbers is also made possible by its strong financial performance compared to older media companies.

“As we have noted in previous letters, we are focused on revenue and operating margin as our key financial metrics – and on engagement (i.e. time spent) as our best measure of customer satisfaction. In our early days, when we had little revenue or profit, membership growth was a strong indicator of our future potential. But now we are generating very substantial profit and free cash flow (FCF). We are also developing new revenue streams such as advertising and our additional membership feature, so memberships are just one part of our growth,” the letter said.

The company continued: “As we have evolved our pricing and subscriptions from single to multiple tiers with different price points depending on country, each incremental paid membership has a very different business impact.”

During an analyst call, co-CEO Greg Peters explained that with Netflix’s ad plan, higher engagement is tied to higher revenue per member, as opposed to the fixed revenue per sub on the ad-free plans. He also noted that under the platform’s paid sharing initiative, primary account holders can add an “additional member” for an increased monthly fee, but these “additional members” will not be counted as separate subscribers.

Netflix is ​​also investing in areas such as live programming, including sports, and in video games to increase engagement.

Netflix also won’t report average revenue per member starting in the first quarter of 2025 (which it calls “ARM”).

“We have evolved and we will continue to evolve,” Peters said. He added: “That simple historical math we have all done, the number of members times the monthly price, is becoming less and less accurate in reflecting the state of the business.”

Netflix will still announce “milestones” for subscribers, but nothing on a regular basis.

Netflix announced the change and reported quarterly results that easily exceeded Wall Street expectations for earnings, revenue and subscriber growth. While benefiting from the move to police password sharing, its subscriber base grew by 9.33 million over the period, to 270 million worldwide. The outperformance also reflects a strong response to new ad-supported streaming plans, which now account for 40% of all signups.

Still, shares of Netflix fell 9.1% on Friday on concerns that the move to stop reporting quarterly subscription totals signaled slower growth in coming quarters. Other tech giants, such as Facebook parent Meta and X, formerly Twitter, stopped reporting monthly active user numbers as growth slowed.

“While it is still early, the potential concern is that subscriber growth will have slowed significantly by 2022 (prior to the implementation of Netflix’s password sharing crackdown),” wrote Bank of America analyst Jessica Reif Ehrlich in a letter to customers. “This could be a harbinger of slowing subscriber growth in the future.”

Of the competitors, Disney, Warner Bros. Discovery and Paramount Global all recently reported weak subscriber growth. Apple and Amazon have never offered quarterly subscriber data for their streaming services.

Amazon Prime growth estimates are still commonly used to gauge Amazon’s stock valuation. Costco, Spotify, Chewy, Wayfair, Warby Parker and Stitch Fix are among the companies that count growth in the number of subscribers or active customers among the most important investor metrics.