After a quarterly earnings announcement that was overall positive but left Wall Street unsatisfied and unclear about major revenue sources, Netflix shares fell more than 8% on Thursday. The decline in Netflix shares comes after a 60% year-to-date gain, which was sparked by the launch of the streaming giant’s less expensive, ad-supported plan and a crackdown on password sharing. Both initiatives were intended to spur development for the company.
Excerpts from the Quarterly Report
In its quarterly report on Wednesday, Netflix provided little information on such measures, and its second-quarter revenue fell short of forecasts. “I think people expected a lot more revenue growth in the third quarter, plus there was the weakness in [average revenue per membership],” MoffettNathanson analyst Michael Nathanson said.
Netflix concentrated on its stated revenue generators rather than raising pricing in the most recent quarter, which resulted in a decline in average revenue per membership. In an effort to encourage customers to choose the less expensive ad plan instead, the business this week withdrew its least expensive, no-ads option.
On the results call on Wednesday, Chief Financial Officer Spencer Neumann stated that price hikes were postponed while the new sharing arrangement was implemented. He explained that for advertising, the business anticipates a “gradual revenue build,” adding that “that’s not expected to be a big contributor this year.”
According to a report from The Information on Wednesday, the ad-supported plan, which debuted late last year, has so far attracted about 1.5 million subscribers, a small portion of all subscribers. On the company’s pre-recorded earnings call, Netflix officials chose not to go into detail about the ad-supported tier.
High Buyside Expectations
“Most of our revenue growth this year is from volume growth through new paid memberships, and that’s largely driven by our paid sharing rollout,” Neumann stated. It is the main source of revenue acceleration for the year, and we anticipate that its influence will increase over time. However, Wall Street analysts claim that it is challenging to forecast Netflix’s revenue in the next two years due to uncertainties surrounding how long it would take revenue-driving initiatives to take effect.
Before Netflix released profits on Wednesday, Wells Fargo analyst Steven Cahall wrote in a note that “buyside expectations are high.” However, Cahall called out investors who were “over-exuberant on paid sharing” in a note published after the earnings announcement, emphasising that revenue growth will take more time and urging investors to exercise patience.