Despite Surprise Increase in Netflix Subscribers, Stock Price Plummets

The world's largest online video service (OTT), Netflix, recorded a subscriber growth that exceeded market expectations in the second quarter. After the pandemic effect ended and Netflix experienced its worst slump, it is now being evaluated that its performance is significantly rebounding due to the crackdown on free account sharing.

On the 19th (local time), Netflix announced its second-quarter earnings, reporting revenue of $8.187 billion, up 2.7% year-over-year, and operating profit of $1.878 billion, up 15.78%. Net income was $1.488 billion, similar to $1.441 billion in the same period last year. Adjusted earnings per share were $3.29, surpassing market expectations of $2.86.

The number of new subscribers also showed a surprising increase. The number of new global subscribers in the second quarter was 5.89 million, far exceeding twice the market expectation of 2.07 million. As of the end of the second quarter, Netflix's total global subscribers reached 238.4 million, an 8% increase compared to one year ago.

The company explained that the growth in net income and subscriber numbers in the second quarter was driven by the monetization of account sharing. The paid account sharing, expanded globally including the United States, affected about 100 million subscribers and is evaluated to have brought about an effective price increase. Netflix emphasized, "In May, we successfully launched paid account sharing in over 100 countries," adding, "Currently, revenue in each region has increased compared to before, and the number of new subscriptions has exceeded the number of cancellations."

[Image source=AP Yonhap News]

Netflix's strong performance came amid a slowdown in the digital media advertising market due to the economic recession headwinds and continued losses by competitors. Bloomberg described it as "the best quarterly performance since the COVID-19 pandemic boom," highlighting that "this contrasts with competitors such as Walt Disney (Disney+) and Warner Bros. Discovery (HBO Max), who continue to experience losses every quarter."

However, the market did not cheer. After the earnings announcement, Netflix's stock price plunged over 8% in after-hours trading. As of 8:08 a.m. Korean time, Netflix shares listed on the Nasdaq were trading at $436.90, down 8.52% from the previous close.

The reason the stock price did not respond positively despite strong earnings is analyzed to be concerns over revenue forecasts. Not only did the second-quarter revenue fall short of market expectations, but the company's third-quarter revenue forecast of $8.52 billion, disclosed on the same day, also fell significantly short of the market expectation of $8.67 billion. Bloomberg analyzed, "Netflix's business strategies, including the expanded introduction of paid account sharing and the new ad model this quarter, will not translate into sufficient performance results."

In a shareholder letter on the same day, Netflix stated, "We continue steady growth this year, but there is more work to be done to accelerate the growth rate," emphasizing, "As the effect of banning account sharing takes full effect, revenue growth will accelerate from the second half of this year."