December 3, 2023

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Netflix Shares of the company fell more than 9% on Thursday following a largely upbeat quarterly earnings report, but Wall Street was disappointed and uncertain about key revenue drivers.

Netflix shares are up 60% so far this year, hit by a sell-off driven by the introduction of cheaper ad-supported plans and a crackdown on password sharing — two moves that were supposed to drive growth for the streaming giant.

Netflix provided few details about the moves in its quarterly report on Wednesday, and its second-quarter revenue missed expectations.

“I think people are expecting a big jump in revenue growth in the third quarter and also a bit of softness (average revenue per member),” said Michael Nathanson, an analyst at MoffettNathanson.

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Shares of Netflix rose on the launch of an ad-supported streaming service and a new password-sharing policy, both aimed at boosting revenue.

Netflix’s average revenue per member was weak in the latest quarter as the streaming company focused on its established revenue drivers rather than raising prices. The company this week removed its cheapest ad-free plan to push customers to opt for the cheaper ad plan.

Chief Financial Officer Spencer Neumann said on Wednesday’s earnings call that the price increase has been put on hold as the new sharing policy rolls out. On the advertising side, the company expects “revenues to grow incrementally,” he said, adding that it “is not expected to be a major contributor this year.”

Launched late last year, the ad-supported program has so far signed up about 1.5 million subscribers, a fraction of the total, according to one company. Report Information from Wednesday.

Netflix executives declined to provide specifics on the ad-support tier during the company’s prerecorded earnings call.

“Most of our revenue growth this year came from growth in new paid memberships, driven in large part by our pay-sharing rollout,” Neumann said. “This is our primary revenue acceleration this year, and we expect the impact … to be felt over several quarters.”

But Wall Street analysts said it was difficult to forecast Netflix’s revenue for the next two years due to uncertainty about how long the revenue-driven plan would take to implement, making the future uncertain.

“Expectations on the buy side are high,” Wells Fargo analyst Steven Cahall said in a note ahead of Netflix’s earnings report on Wednesday.

However, Cahall said in a note after the earnings report that “patience is a virtue” and called on investors to be “overzealous about pay-to-share,” noting that revenue growth will take longer.

“It didn’t happen overnight,” Netflix co-CEO Greg Peters said on Wednesday’s investor call.

Netflix forecast third-quarter revenue of $8.5 billion, up 7% year-over-year.

The streaming giant is faring better than its traditional media rivals, with an uptick in subscriber growth showing strength while others struggle and brace for turbulence for the rest of the year as they seek streaming profits and face strikes by Hollywood actors and writers.

Netflix said on Wednesday it added 5.9 million subscribers, but said it would shift its focus to revenue growth and forecasts after its first subscriber loss in a decade sent its stock spiraling lower last year.