Streaming giant Netflix (NFLX) has identified accelerating growth as its top priority after experiencing lower-than-expected second-quarter sales and projecting third-quarter revenue that fell short of consensus estimates. The news led to an 8% drop in the company’s stock on Thursday.
Netflix CFO Addressing the Concerns
Netflix’s Chief Financial Officer, Spencer Neumann, addressed the concerns during an earnings call following Wednesday’s results. He emphasized that while they achieved revenue in line with their expectations in Q2, their primary objective is to accelerate revenue in Q3 and further in Q4. Neumann outlined that the growth in revenue will be driven by a combination of factors, including pricing, volume, and new revenue streams, such as ads. However, he also acknowledged that these initiatives will require time to mature. Just ahead of the results, the company quietly removed its lowest-priced ad-free streaming plan in the US.
One promising aspect for Netflix is the remarkable addition of 5.89 million net subscribers in Q2, which significantly surpassed estimates of 2.1 million. This surge was mainly attributed to the crackdown on password sharing, also known as the paid sharing rollout, implemented in the US in late May.
Neumann revealed that the paid sharing rollout would be the primary revenue accelerator for the year, with its impact expected to grow over several quarters. Additionally, he expressed optimism that average revenue per membership (ARM) would improve over time as revenue continues to expand.
Analysts Remain Confident
Despite the stock decline following the earnings report, analysts remain confident in Netflix’s strategy. Wells Fargo analyst Steve Cahall believes the revenue acceleration might take longer, but it presents an entry point for patient, long-term investors. He maintained an Overweight rating and a price target of $500.
Wedbush analysts Alicia Reese and Michael Pachter shared the sentiment, stating that the positive impacts of the sharing crackdown and ad-based offering have only just begun. They maintained an Outperform rating on the stock and raised their price target to $525, up from $475.
Macquarie senior media tech analyst Tim Nollen took a more neutral stance with a $410 price target, attributing the share price reaction to heightened sentiment before the report. However, he believes Netflix is well-positioned amidst the changing strategies of streaming platforms and should be valued as an immensely profitable, slow-growth company.
Despite the recent challenges, Netflix remains steadfast in its commitment to increasing profitability and free cash flow. As the company continues to focus on revenue acceleration, its ability to retain subscribers, introduce new revenue streams, and enhance profitability will play a pivotal role in its future success.