Netflix’s stock experienced a sharp decline of more than 9% on Thursday following the release of its quarterly earnings report. While the report was generally positive, Wall Street was left uncertain about the key revenue drivers and their potential impact on the streaming giant’s future growth.
The past year has seen Netflix shares rally by an impressive 60%, partly fueled by the introduction of its cheaper, ad-supported plan and a crackdown on password sharing, both of which were expected to drive significant growth for the company.
Financial analysts have been closely monitoring Netflix’s performance, and some advised investors to “buy the pullback” while emphasizing the potential subscriber growth “supercharged” by password sharing. However, there were cautious warnings that expectations might have been set too high for the company heading into earnings.
In its quarterly report, Netflix provided limited details about the aforementioned initiatives, and its second-quarter revenue fell short of expectations. Analyst Michael Nathanson of MoffettNathanson pointed out that people were expecting more revenue growth in the third quarter, especially with the weakness in average revenue per membership.
One of the factors contributing to Netflix’s revenue challenges was the focus on its stated revenue drivers, such as the rollout of ad-supported streaming and a new password sharing policy, instead of resorting to price increases. The company deliberately removed its least expensive, no-ads plan, urging customers to opt for the cheaper ad-supported plan.
During the earnings call, Netflix’s Chief Financial Officer, Spencer Neumann, explained that price increases were put on hold as they introduced the new sharing policy. As for the advertising aspect, the company expects a gradual revenue build and does not anticipate it to be a major contributor in the current year.
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The ad-supported plan, launched late the previous year, had accumulated around 1.5 million subscribers, a relatively small fraction compared to the overall number of subscribers. Despite this, Netflix remains positive about its primary revenue acceleration this year, driven primarily by the rollout of paid sharing, expecting its impact to gradually increase over several quarters.
However, uncertainty surrounds the timing and effectiveness of revenue-driving initiatives, making it difficult for Wall Street analysts to project Netflix’s revenue over the next two years. Wells Fargo analyst Steven Cahall noted that expectations were high among investors, but he emphasized the need for patience, stating that revenue growth would take time.
Netflix’s forecast for third-quarter revenue is set at $8.5 billion, a year-over-year increase of 7%. While the company has outperformed its legacy media competitors and demonstrated strength in subscriber growth, it faces potential challenges in the streaming landscape, especially with the ongoing Hollywood actors and writers strikes.
Following last year’s subscriber loss, which led to a downward spiral in its stock value, Netflix is now shifting its focus towards revenue growth and implementing strategic forecasts to navigate the ever-evolving streaming market. As the streaming industry continues to evolve, investors remain eager to see how Netflix will navigate the uncertainties and capitalize on its strengths to remain a dominant player in the market.
