Shares of Netflix (NFLX.O) tumbled 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 – nearly 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 shares, which have risen more than 60% this year, were on course for their worst day in 2023, erasing nearly $18 billion from the company’s market value if losses hold.
“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.
Netflix 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.
However, analysts remained broadly upbeat on Netflix stock, with at least 23 of them lifting their price targets to push the median view to $445, or about 7% lower than its last closing price.
The company has a 12-month forward price-to-earnings ratio of 36.16, well above Disney’s 18.12 and the industry mean of 15.47.
“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.
The ongoing strike in Hollywood could be a positive as well, analysts said, as Netflix already had a pipeline of completed titles, as well as a major international presence where the strike would have no impact.
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.
