Netflix (NASDAQ:NFLX) announced a significant increase of over 8 million subscribers in the second quarter, driven by its crackdown on password sharing and the popularity of hit shows such as “Bridgerton,” “Baby Reindeer,” and “The Roast of Tom Brady.” Despite the higher-than-expected subscriber gains, Netflix provided cautious guidance for the upcoming third quarter, indicating that its advertising business will not become a major revenue driver until at least 2026.
Netflix’s second-quarter results showed a stronger performance compared to previous periods, with shares rising 1% in after-hours trading. This continues a trend of substantial stock growth, adding nearly a third in value this year. Historically, Netflix has faced challenges in maintaining its subscriber growth in a saturated U.S. market, coupled with growing competition from other streaming services. The company’s recent focus on ad-supported tiers is a strategic move to explore additional revenue streams, although it remains to be seen if it will significantly impact its earnings.
Subscriber Gains and Future Guidance
While Netflix’s recent subscriber additions exceeded analyst predictions of 5 million, the company expressed caution about the next quarter’s growth. The streaming giant revealed that third-quarter subscriber increases would not match the same period from 2023, attributing this to the initial boost from its password-sharing crackdown. Netflix’s vice president of ad sales, Peter Naylor, has announced his departure, adding another layer of uncertainty to the company’s advertising ambitions.
“Netflix is still the best and most profitable streaming company out there, but with technology stocks generally retreating over the last several days, some investors may sell on the generally good news and taking profits now while waiting for a possible better re-entry point for the stock,” said Michael Ashley Schulman, chief investment officer at Running Point Capital.
Advertising Business and Revenue Projections
Netflix’s advertising business, still in its early stages, has yet to establish itself as a robust revenue source. The company reported that its ad tier membership grew by 34% from the previous quarter. However, the company did not disclose the exact number of subscribers opting for this tier. Analysts like Jamie Lumley from Third Bridge caution that Netflix needs to scale its ad business significantly to compete with giants like Amazon (NASDAQ:AMZN) in this sector.
“Our ad business is growing nicely and is becoming a more meaningful contributor to our business,” Netflix stated in a letter to investors. “But building a business from scratch takes time – and coupled with the large size of our subscription revenue – we don’t expect advertising to be a primary driver of our revenue growth in 2024 or 2025.”
For the April to June period, Netflix reported diluted per-share earnings of $4.88, which was above the consensus forecast of $4.74 a share. Revenue for the quarter was $9.56 billion, aligning with market expectations. The increase in global subscriptions brought Netflix’s total subscriber base to over 277 million by the end of June.
Looking ahead, Netflix plans to expand its video game initiatives, with new titles linked to popular shows like “Squid Game,” “Emily in Paris,” and “Selling Sunset” set for release later this year. The company expects a 14% revenue growth for the third quarter compared to the same period last year, reflecting its ongoing efforts to diversify its offerings and revenue streams.
Netflix’s cautious approach towards its advertising business and the projected revenue growth highlights the company’s strategic planning in navigating a competitive and saturated market. Investors and analysts will be closely watching Netflix’s performance in the next quarters, particularly the impact of its ad-supported tiers and new content on its subscriber base and revenue.
