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Netflix The stock sank more than 9% on Thursday after a quarterly earnings report was largely positive, but left Wall Street frustrated and unsure about key revenue drivers.
The sell-off in Netflix shares follows a 60% year-to-date rally spurred by the launch of its cheaper, ad-supported plan and a crackdown on password sharing — both of which were supposed to drive growth for the streaming giant.
Netflix provided few details about these initiatives on Wednesday in its quarterly report, and its revenue in the second quarter fell short of expectations.
“I think people expected much more revenue growth in the third quarter, as well as there being weakness in[average revenue per membership],” said analyst Michael Nathanson of MoffettNathanson.
Netflix stock soared with the rollout of ad-supported streaming and a new password-sharing policy, which aims to boost revenue.
Netflix’s average revenue per membership showed weakness last quarter as the operator focused on specific revenue drivers rather than increasing prices. The company this week removed its lowest-cost ad-free plan in an effort for customers to opt for the cheaper ad-free plan instead.
Chief Financial Officer Spencer Newman said on an earnings call Wednesday that the price increases have been put on the back burner as the new share policy goes into effect. As for the announcement, he said, the company expects “a gradual build-up of revenue,” adding, “It’s not expected to be a significant contributor this year.”
The ad-supported plan, which launched late last year, has so far logged around 1.5 million subscribers, a small fraction of the total, according to a report From Wed information.
Netflix executives declined to provide details about the ad-supported tier in the company’s pre-recorded earnings call.
“Most of our revenue growth this year is coming from volume growth through new paid memberships, and that’s largely driven by the rollout of paid participation,” Newman said. “It’s our primary revenue acceleration in the year, and we expect that impact to accrue over several quarters.”
But with uncertainty over how long revenue-raising initiatives will take to take hold, it’s hard to project Netflix’s revenue in the next two years, making the future uncertain, according to Wall Street analysts.
“Buy expectations are high,” Wells Fargo analyst Stephen Cahal said in a note ahead of Netflix’s earnings announcement on Wednesday.
However, in a note after the earnings report, Cahal said that “patience is a virtue,” and called out investors who were “overindulging in paid participation,” noting that revenue growth will take longer.
“It’s not an overnight thing,” Netflix co-CEO Greg Peters said during the investor call Wednesday.
Netflix expects third-quarter revenue of $8.5 billion, up 7% year-over-year.
The streaming giant has fared better than its legacy media rivals, its boost in subscriber growth showing its strength with another struggle and preparing for a turbulent rest of the year as they hunt for streaming profits and contend with strikes by Hollywood actors and writers.
Netflix said Wednesday it had added 5.9 million customers, but after its first subscriber loss last year in a decade sent its stock lower, the company said it would shift focus to revenue growth and forecasts.
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