Netflix stock sinks as Wall Street looks for clarity on revenue growth

Netflix shares sank more than 8% on Thursday after a quarterly earnings report that was largely positive but left Wall Street excited and uncertain about key revenue drivers.

The selloff in Netflix shares follows a 60% year-to-date rally, boosted by the rollout of its cheaper, ad-supported plan and a crackdown on password sharing, both of which were supposed to boost the streaming giant’s growth.

Netflix offered few details on those initiatives on Wednesday in its quarterly report, and its second-quarter earnings missed expectations.

“I think people expected a lot more revenue growth in the third quarter, plus there was weakness [average revenue per membership]” said analyst Michael Nathanson of MoffettNathanson.

Netflix’s average membership revenue showed weakness last quarter as the streamer focused on its stated revenue drivers instead of raising prices. The company this week removed its cheapest ad-free plan, urging customers to opt for the cheaper ad plan instead.

Chief Financial Officer Spencer Neumann said on Wednesday’s earnings call that price increases have been put on the backburner with the new sharing policy in place. On the advertising side, he said, the company expects a “gradual increase in revenue,” adding that “it’s not expected to be a big contributor this year.”

The ad-supported plan, which launched late last year, has so far signed up about 1.5 million subscribers, a small fraction of total subscribers, according to a report by The Information on Wednesday.

Netflix executives declined to provide details on the ad-supported level in the company’s pre-recorded earnings call.

“Most of our revenue growth this year has come from volume growth through new paid memberships, and that’s largely driven by our implementation of paid sharing,” Neumann said. “This is our main revenue acceleration for the year, and we expect that impact … to build up over several quarters.”

But with uncertainty surrounding how long revenue-boosting initiatives will take to take hold, it’s difficult to forecast Netflix’s earnings over the next two years, making the future murky, according to Wall Street analysts.

“Buyer expectations are high,” Wells Fargo analyst Steven Cahol said in a note before Netflix reported earnings on Wednesday.

However, in a post-earnings note, Cahol said “patience is a virtue” and called out investors who are “over-enthusiastic about paid sharing”, noting that revenue growth will take longer.

“This is not an overnight thing,” Netflix co-CEO Greg Peters said on Wednesday’s call with investors.

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

The streaming giant fared better than its legacy media rivals, and its surge in subscriber growth showed its strength as others struggle and brace for a tumultuous 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 customers, but after last year’s first subscriber loss in a decade sent its stock into a downward spiral, the company said it would shift focus to revenue growth and forecasts.