Netflix, the popular streaming giant, experienced a significant stock drop of more than 8% on Thursday following its latest quarterly earnings report.
While the report overall carried a positive tone, Wall Street remained underwhelmed, particularly due to concerns surrounding revenue growth.
SurgeZirc US gathered that one of the key areas of concern was Netflix’s average revenue per membership, which showed weakness in the most recent quarter.
Analyst Michael Nathanson of MoffettNathanson expressed, “I think people expected a lot more revenue growth in the third quarter.”
The sell-off came in the wake of a remarkable 60% year-to-date rally in Netflix’s stock, driven by the introduction of its more affordable, ad-supported plan, and its efforts to clamp down on password sharing – both of which were expected to propel growth for the streaming giant.
However, the quarterly report offered limited details about the progress of these initiatives, and Netflix’s second-quarter revenue fell short of expectations.
Part of the revenue concern stemmed from Netflix’s decision to focus on its stated revenue drivers rather than increasing subscription prices.
The company had recently removed its least expensive, no-ads plan in favor of promoting the cheaper ad-supported plan to its customers.
Chief Financial Officer Spencer Neumann explained on the earnings call, “Price increases were put on the back burner as the new sharing policy rolled out. For advertising, we expect a gradual revenue build, and it’s not expected to be a big contributor this year.”
The Netflix ad-supported plan, launched late last year, has managed to attract around 1.5 million subscribers so far, but it represents a small portion of the overall subscriber base.
Specifics on the ad-supported tier were not disclosed during the earnings call, leaving investors seeking more clarity on the potential impact of this revenue stream.
Netflix executives emphasized that most of their revenue growth in the current year stems from an increase in volume through new paid memberships, driven by their paid sharing rollout.
Neumann stated, “It is our primary revenue acceleration in the year, and we expect that impact to build over several quarters.”
Nevertheless, Wall Street analysts remain cautious about projecting Netflix’s revenue growth for the next two years due to uncertainties surrounding the success and timing of these revenue-driving initiatives.
Steven Cahall, an analyst from Wells Fargo, expressed the high expectations from the investors, while also acknowledging that patience with Netflix will be essential, particularly regarding paid sharing.
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Netflix’s third-quarter revenue is projected to be $8.5 billion, marking a 7% increase year over year. Despite the recent stock dip, the streaming giant has outperformed its traditional media competitors and showcased its strength with a boost in subscriber growth.
However, Netflix continues to face a challenging landscape as the industry deals with Hollywood actors and writers strikes, making it more critical for the company to focus on revenue growth and forecasts.
