Netflix stock dropped close to 9% Thursday in response to the recent quarterly earnings report, whose results were generally positive but failed to captivate investors. Subscription's average revenue for the period was weaker than expected. Michael Nathanson of MoffettNathanson stated, "It seems as though people were expecting larger revenue gains for the third quarter."
Netflix's stocks dropped by more than 9% Thursday due to a quarterly earnings report that, while generally positive, did not meet Wall Street's expectations and left doubts over some revenue sources. This sell-off follows a massive year-to-date surge of 60%, accompanied by the launch of a cheaper, advertisement-supported plan and a move to combat password sharing, both of which were expected to bring growth opportunities for the streaming service. Nevertheless, in its quarterly report, Netflix provided sparse information regarding these measures, with its Q2 revenue failing to reach the predicted figure. According to analyst Michael Nathanson of MoffettNathanson: "People were anticipating more revenue growth in the third quarter, and we can see that average revenue per membership was weak".
When discussing its most recent quarter, Netflix reported weak average revenue per membership. This was a result of the company's focus on revenue drivers as opposed to increasing prices. Moreover, the streamer removed its least expensive, no-ads plan in an effort to encourage customers to opt for the cheaper ad-supported plan instead. The new ad-supported tier has signed up 1.5 million subscribers since its launch late last year.
Netflix's CFO, Spencer Neumann, acknowledged on an earnings call that price hikes were put on the back burner, predicting that the new paid membership sharing policy will provide the primary revenue acceleration in the year. However, it's difficult to ascertain the exact revenue progress in the next two years due to the uncertainty around the effectiveness of these initiatives.
For now, Wells Fargo analyst Steven Cahall has urged investors to be patient, noting that revenue growth may take longer than expected. Netflix co-CEO Greg Peters echoed this sentiment, emphasizing that it's "not an overnight kind of thing". Despite this, Netflix still reported a 7% year-over-year increase in third quarter revenue, making it a much better performer than its traditional media rivals. Moreover, it added 5.9 million customers, indicating its continued strength as other companies face the challenges posed by the actor and writer's strike.
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