Netflix Inc. (NASDAQ:NFLX) reported second-quarter earnings that surpassed expectations, but the stock fell by as much as 6% in after-hours trading. This decline was driven by the streaming giant’s revenue outlook for the current quarter, which missed Wall Street’s expectations.
Revenue Growth and Guidance Miss
In Q2, Netflix reported revenue of $9.56 billion, marking a 16.8% increase compared to the same period last year. This growth was driven by initiatives such as the crackdown on password sharing, the introduction of an ad-supported tier, and last year’s price hikes on certain subscription plans. Analysts had expected revenue of $9.53 billion, according to Bloomberg. However, Netflix’s guidance for third-quarter revenue was $9.73 billion, falling short of consensus estimates of $9.83 billion.
Netflix Stock Performance and Market Reaction
Following the revenue guidance miss, Netflix’s stock, which had been performing strongly with a 30% increase since the start of the year, experienced a notable drop. The company did raise its full-year 2024 revenue growth projection to 14%-15% from the previous 13%-15%, and also expects full-year operating margins to reach 26%, up from 25%. Despite these positive projections, the market’s reaction was driven by the short-term revenue outlook.
Earnings and Subscriber Growth
Netflix reported diluted earnings per share of $4.88, surpassing consensus expectations of $4.74 and significantly higher than the $3.29 EPS reported in the same quarter last year. For the third quarter, Netflix guided to EPS of $5.10, exceeding analyst expectations of $4.74.
Subscriber growth remained robust, with Netflix adding 8.05 million new users, beating expectations of 4.7 million. This follows the addition of 9.3 million subscribers in the first quarter. Key programming, such as the latest season of “Bridgerton,” contributed to this growth. In Q2 2023, Netflix had added 5.9 million paying users, indicating strong year-over-year growth.
Ad-Supported Tier and Strategic Moves
Netflix’s ad-supported tier has seen significant growth. In May, the company announced it had won streaming rights to two NFL games set to air on Christmas Day as part of a three-season deal. During its May Upfront presentation, Netflix revealed that its ad tier had reached 40 million global monthly active users, up from 15 million in November and a 35 million-user increase from the previous year.
The company also noted that ad tier memberships grew by 34% quarter-on-quarter. To further boost this segment, Netflix plans to phase out its basic plan membership in the US and France, following similar moves in the UK and Canada. The basic tier was previously its cheapest ad-free plan at $9.99 in the US.
Long-Term Ad Strategy and Price Adjustments
Netflix’s strategy to enhance its ad business includes raising prices for ad-free subscriptions to encourage users to switch to the ad-supported offering. The company believes it is on track to achieve significant ad subscriber scale in its ad-supported countries by 2025, with plans to expand further in 2026 and beyond.
The crackdown on password sharing has also contributed to Netflix’s top-line growth and increased its overall subscriber base. However, the company has faced challenges, such as its decision to stop reporting subscriber figures and the average revenue per member metric starting next year. This decision has raised concerns about Netflix’s long-term subscriber growth and the sustainability of its recent momentum.
Conclusion
Netflix’s second-quarter earnings highlighted strong financial performance and subscriber growth, but the disappointing revenue guidance for the next quarter led to a decline in stock performance. As Netflix continues to navigate the competitive streaming landscape, its strategic moves, including the expansion of the ad-supported tier and adjustments to subscription plans, will be crucial in sustaining growth and enhancing its market position.
Featured Image: Freepik
