Netflix Shares Fall After Big Q2 Subscriber Beat, as Investors Hoped for Bigger Bang From Password-Sharing Crackdown

Shares of Netflix were down nearly 8% in early trading Thursday, coming after the streamer blew away estimates on subscriber gains for the second quarter — and analysts saying the company continues to be well positioned to weather Hollywood’s double actors and writers strike relative to its peers. But investors had been anticipating a bigger bump from its new initiative to monetize password-sharing accounts.

Note that Netflix’s post-earnings stock drop came amid high investor expectations leading into the Q2 report: Shares were up nearly 62% year to date in 2023.

Revenue for Q2 came in at $8.19 billion, shy of Wall Street’s $8.3 billion consensus expectations. And Netflix’s guidance for Q3 revenue of $8.52 billion also was less than the $8.9 billion average forecast by analysts. The company added 5.9 million net new subs in the second quarter, more than double expectations, and said it expects to add about the same number in Q3.

The company told investors that its move to push password-piggybackers to sign up for their own accounts or be added as an “extra member” was having the intended effect of boosting overall subscriber numbers. Regarding the paid-sharing launch, which Netflix broadly rolled out in 100-plus countries in mid-May, “we’re seeing that it’s working,” co-CEO Greg Peters said on the earnings interview. “We’re positive in terms of both revenue and subscribers relative to pre-launch in all of our regions. But I also think it’s important to note that the business impacts of that product experience will roll in over several quarters.”

However, Netflix didn’t share details on the paid-sharing program, nor did it provide new data on its ad-supported tier except to say revenue is still not material.

“Without company disclosure around the number of ‘Extra Members’ being added to accounts as part of the password-sharing crackdown, the number of users that crackdown has even targeted so far or any insight into the number of subscribers on the Standard with Ads tier, the drivers underpinning Netflix’s revenue growth are more unclear than ever, giving us less confidence in our ability to accurately model this company,” MoffettNathanson principal analyst Michael Nathanson wrote in a note. The firm has a “market perform” rating on Netflix with a target price of $380/share ().

Most of Netflix’s revenue growth for 2023 will be from new paid memberships — after the company has paused price hikes in major markets for at least a year — largely driven by the paid-sharing rollout, CFO Spence Neumann told analysts on the earnings interview: “It is our primary revenue accelerator in the year.”

Right now, Netflix is on track to reach nearly 25 million net adds from the paid-sharing program in 2023, Morgan Stanley analyst Ben Swinburne wrote in a note, adding that would be under his prior 25 million-30 million projection. “Netflix’s goal for the past 18 months has been to re-accelerate revenue growth into the double digits — it appears on track to get there in 4Q,” the analyst wrote, although he revised the fourth-quarter revenue growth estimate for Netflix from +12% to +10%.

Despite the stock pullback, analysts generally remain bullish on Netflix’s status as the leader in the streaming market.

“Overall, Netflix remains well positioned to remain a secular streaming winner, in our view. We believe 2023 stock upside will likely be driven by a combination of potential multiple expansion and revenue growth as the company accelerates growth, expands margin and increases free cash flow throughout 2023,” William Blair analyst Ralph Schackart wrote in a research note about the Q2 results. The firm maintains an “outperform” rating on Netflix stock.

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