Shares of Netflix tumbled more than 8% on Thursday after the video-streaming pioneer's lackluster revenue rise sparked concerns of a longer road to growth from its new initiatives.
The company added nearly 6 million subscribers in the second quarter - almost three times above Wall Street's expectations - thanks to a crackdown on password sharing and the introduction of a cheaper subscription tier that is bundled with advertising.
However, quarterly revenue growth and forecast lagged estimates, prompting co-Chief Executive Officer Greg Peters to caution that it would take "several quarters" to see returns from those efforts.
"Netflix needs to squeeze as much juice as it can from different avenues," Hargreaves Lansdown analyst Sophie Lund-Yates said, adding the market was "realms away from knowing" if the much-touted ad tier could become the new cash cow.
The company has been fighting off rivals Disney+ and Amazon's Prime Video in an industry that is showing signs of saturation in the United States. Many of the company's new sign-ups are in countries where it charges lower prices.
Netflix shares were on course for their worst day in 2023 and were also on track to shed nearly $20 billion in market value. Trading volumes in the stock, which is up 48% so far this year, were also the highest in two months.
"Some folks are using the result as an excuse to take some profits," Pivotal Research Group analyst Jeffrey Wlodarczak said.
Analysts remained broadly upbeat on the stock though, with at least 26 of them lifting their price targets on hopes that revenue growth would accelerate in the second half of 2023 thanks to the new money-making initiatives.
They also said the ongoing strike in Hollywood might not hit Netflix's content slate until 2024 and that it could give the company an edge over its peers as it has a solid lineup of shows.
The company also has a big international presence, giving it access to a wide range of non-U.S. shows and shielding it from the strike. Its non-English titles such as "Physical 100", "The Glory" and "Alice in Borderland" have also been gaining in popularity.
"Every other streamer is now increasing prices, while Netflix is now extremely competitive with its ad tier. It is putting all the building blocks in place for future revenue growth," PP Foresight analyst Paolo Pescatore said.
He added the company would also benefit from its move to remove the cheapest plan without ads tier in core markets, which should help support declining average revenue per user.
Netflix on Wednesday raised its 2023 free-cash-flow forecast to at least $5 billion from an earlier estimate of about $3.5 billion as a result of the strike.
The median price target on the company now stands at $467.50, or about 2% lower than its last closing price. Netflix has a 12-month forward price-to-earnings ratio of 36.16, well above Disney's 18.12 and an industry mean of 15.47.
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