Netflix reported on Thursday that it gained over 8 million subscribers in the second quarter, surpassing analysts’ expectations of 5 million. This impressive growth was driven by the company’s crackdown on password sharing and the popularity of its hit titles, including “Bridgerton,” “Baby Reindeer,” and “The Roast of Tom Brady.” Despite this strong performance, Netflix issued a cautious outlook for the third quarter, noting that its advertising business would not become a significant revenue driver until at least 2026.
Following the announcement, Netflix shares initially dipped but later rose by 1% in after-hours trading. The stock has surged nearly 33% year-to-date. Michael Ashley Schulman, chief investment officer at Running Point Capital, commented on the situation, saying, “Netflix is still the best and most profitable streaming company out there.” However, he noted that some investors might sell on the generally good news and take profits now while waiting for a possible better re-entry point for the stock.
As the streaming video market in the United States becomes more saturated, Netflix plans to stop regularly reporting new subscriber additions next year. Investors are increasingly focusing on the company’s relatively new advertising business as a potential source of growth. For the third quarter, Netflix expects subscriber gains to be lower than the same period in 2023, which had just begun the password-sharing clampdown. The company also announced the departure of Peter Naylor, its vice president of ad sales.
Third Bridge analyst Jamie Lumley commented that Netflix’s advertising business has yet to prove its revenue potential. He noted, “Our experts highlight that Amazon has made a much bigger splash in the ad market, and Netflix needs to continue working on scale in this segment if it wants to be a major player.”
For the quarter from April to June, Netflix reported diluted earnings per share of $4.88, exceeding the consensus forecast of $4.74 per share according to LSEG. The company’s revenue for the quarter reached $9.56 billion, aligning with market estimates. By the end of June, Netflix had over 277 million global subscribers.
The ad-supported membership tier saw a 34% growth from the previous quarter, though Netflix did not disclose the number of subscribers opting for this tier. In a letter to investors, Netflix stated, “Our ad business is growing nicely and is becoming a more meaningful contributor to our business. 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.”
In a post-earnings video, Netflix Chief Financial Officer Spencer Neumann reiterated that while the ad business is “growing nicely,” it is still in its early stages. “It’s a meaningful contributor,” Neumann said, adding that by 2026 and beyond, advertising could become a primary revenue driver.
Netflix forecasts a 14% revenue growth for the third quarter compared to the previous year. Additionally, the company continues to expand its videogame initiative, planning to release a multiplayer game based on “Squid Game” alongside Season Two of the series. Other games tied to popular series like “Emily in Paris” and “Selling Sunset” are also in the pipeline.
The company’s strategic moves and future plans highlight its efforts to diversify revenue streams and maintain its leading position in the competitive streaming market. As Netflix navigates through market saturation and explores new business avenues, its focus on innovation and expansion remains critical for its long-term growth.