Netflix has 'long runway ahead' after 'Squid Game' success; Chappelle headwinds loom

·4-min read

Netflix's (NFLX) Q3 subscriber growth estimates topped expectations following a slow start to the year — but there could be trouble looming for the streaming platform as controversies flare. 

Net subscriber additions totaled 4.38 million versus the 3.72 million expected. This represented a significant rebound from the second quarter, when just 1.5 million new paying users joined the streaming service.

A particularly strong content slate helped fuel subscriber momentum, but not even the entertainment behemoth could have anticipated the global success of "Squid Game."

The breakout Korean series smashed records with 142 million people watching the show in its first four weeks. That number wildly surpassed the previous 28-day viewership record, held by Shonda Rhimes' "Bridgerton" at 82 million. 

(Caveat: Netflix counts a ‘viewer’ as someone who watches at least 2 minutes of a piece of content, although the company said it will switch to reporting hours viewed for its shows instead of the number of accounts watching them later this year.)

"Squid Game" (CTSY: Netflix)
"Squid Game" (CTSY: Netflix)

According to Bloomberg, "Squid Game," which cost just $21.4 million to produce, is now worth $900 million. 

"What they're doing now is really globalizing local content," Santosh Rao, Manhattan Venture Partners head of research, told Yahoo Finance Live following the earnings announcement.

The analyst went on to say that the low-cost benefits of producing quality content outside of the U.S. "is a great thing," adding that "international markets are only 10% penetrated."

"There's a long runway ahead for Netflix, and they're leading that charge," he continued. 

Overall, Netflix said it anticipates 8.5 million new paid users will join the platform in the fourth quarter, compared to the 8.32 million consensus analysts expected.

Rao explained that fourth quarter guidance "is much more impressive" considering "there is so much competition out there." 

Media analyst and LightShed Partners Partner Rich Greenfield agreed, explaining that for Netflix, "it's all about rebuilding credibility with investors. The stock has had a huge move...the reality is they need to keep beating expectations."

The analyst added that he doesn't see many headwinds ahead for the streaming giant, doubling down on the notion that "there's a lot of growth ahead" for Netflix — especially overseas with "hundreds of millions of subscribers to capture." 

Netflix's Dave Chappelle controversy looms

Actor Dave Chappelle arrives for the press conference to promote the film A Star is Born at the Toronto International Film Festival (TIFF) in Toronto, Ontario, Canada, September 9, 2018.  REUTERS/Mario Anzuoni
Actor Dave Chappelle arrives for the press conference to promote the film A Star is Born at the Toronto International Film Festival (TIFF) in Toronto, Ontario, Canada, September 9, 2018. REUTERS/Mario Anzuoni

However, Netflix's Dave Chappelle controversy seems to be muddling the positive sentiment surrounding its Q3 earnings successes. 

An employee walk-out over the release of "The Closer," Chappelle's controversial comedy special that critics have deemed transphobic, will take place on Wednesday. 

A Netflix spokesperson addressed the walk-out in an email to Yahoo Finance, writing, "We value our trans colleagues and allies, and understand the deep hurt that’s been caused. We respect the decision of any employee who chooses to walk out, and recognize we have much more work to do both within Netflix and in our content."

Yet, Netflix has defended the special with Co-CEO and Chief Content Officer Ted Sarandos sending a letter to employees last week that read in part, "While some employees disagree, we have a strong belief that content on screen doesn’t directly translate to real-world harm.... Adults can watch violence, assault and abuse – or enjoy shocking stand-up comedy – without it causing them to harm others."

However, analysts say Netflix has work to do in addressing the ensuing firestorm, which hasn't quieted down. 

"I don't think [Netflix] has done a very good job in really addressing that issue," Manhattan Venture's Rao said, adding that an organized, sustained campaign could hurt the platform in the long run.

We want to 'really entertain the world'

On Tuesday, the streaming giant's leadership team did not address the controversy, or the walk-out, in the company's 41-minute, pre-taped earnings video.

Instead, the executives praised the success of "Squid Games" (Co-CEO Reed Hastings and VP Investor Relations and Corporate Development Spencer Wang donned the series' staple, green tracksuits) and revealed plans to spend even more than the current $17 billion budget on original content. 

"It would be incredibly satisfying if we can build up to much bigger content budgets than we have," Hastings said during the recording. 

He went on to explain that the goal is to one day “really entertain the world" and "be a place that the whole world goes to for most of their entertainment." 

"We don't see a ceiling, at least in the foreseeable future," CFO Spencer Neumann added. 

Alexandra is a Producer & Entertainment Correspondent at Yahoo Finance. Follow her on Twitter @alliecanal8193

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