Netflix came under pressure in after-hours trading after its latest earnings release pointed to a softer growth path ahead. The company said revenue growth is expected to slow for a second straight quarter, and its third-quarter forecast came in slightly below analyst estimates, sending the stock down as much as 9% after the bell.
While second-quarter revenue and profit were broadly in line with Wall Street expectations, the market reaction showed that investors were focused more on the outlook than on the quarter just reported. According to the report, worries about Netflix’s longer-term growth have intensified as the company faces a failed effort to acquire Warner Bros. Discovery Inc., gaps in major new releases and signs that its core market is getting harder to expand.
Third-quarter guidance misses expectations
Netflix forecast third-quarter revenue of $12.9 billion and earnings per share of $0.82. Both figures were described as slightly below analyst expectations. The company’s guidance also indicated that revenue growth will decelerate for two consecutive quarters, adding to concern about the durability of its growth story.
The stock fell nearly 9% in after-hours trading after the forecast was released. The report said Netflix shares have already declined by more than 40% over the past year, against the backdrop of the unsuccessful Warner Bros. Discovery deal and operating results that have not met the market’s hopes.
Second-quarter results matched expectations, but content gaps remain a concern
For the second quarter, Netflix reported revenue of $12.6 billion and earnings per share of $0.80, broadly matching market forecasts. Even so, the company dealt with what the report described as several months of a drought in major new releases during the first half of the year. A number of returning series also failed to hold viewers as effectively as expected.
The report added that I Will Find You, a new original series adapted from a Harlan Coben novel, set a new high for viewership among the company’s releases this year. Even with that title performing well, investors are still watching whether Netflix can keep its content output steady over time.
Live sports, video podcasts and generative AI are part of the next push
Netflix said it is trying to find new avenues for growth as its addressable market penetration has reached 45% and its share of global TV viewing stands at 5%. Chief Financial Officer Spencer Neumann said the company is not judging its business by a single quarter and still expects revenue to increase by $6 billion this year.
To reach new audiences, Netflix is investing heavily in live sports and video podcasts, and it is also working with a number of popular social media creators. Management expects total content spending to rise by about 10% this year. The company also said generative AI technology is being applied across roughly 300 programs.
Less frequent viewing disclosures raise transparency questions
Netflix said viewing hours in the first half of the year rose 2%, a performance the report described as slightly better than last year. It also noted that the gain came in a period that included competition from major events such as the World Cup and the Winter Olympics.
At the same time, Netflix said it will change its audience viewing report from a semiannual release to an annual one. Mike Proulx, research director at Forrester, said the move reduces transparency at a time when user engagement is under close scrutiny, which could leave investors more uneasy.
Free trials and a free ad-supported option are under review
Co-CEOs Greg Peters and Ted Sarandos said the company is evaluating a range of strategies to keep attracting new users in a market that is showing signs of saturation. One option under consideration is the return of free trials in selected markets.
Management is also studying the possibility of launching a free ad-supported television, or FAST, offering. Peters said any free plan would need to be handled with care to avoid cannibalization of existing paid subscription tiers.