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The reaction on Wall Street marks the latest indication of a profound shift in investor priorities away from subscriber growth and toward the bottom line, which holds implications for striking writers and actors as well as the shows and movies that end up on screen, experts told ABC News.
A password-sharing crackdown helped the streaming platform add 5.9 million subscribers over the three months ending June, which marked a staggering improvement from the same period a year ago when the company lost nearly 1 million subscribers, Netflix said.
In all, Netflix said it boasts about 232 million subscribers, far outpacing its nearest rival Disney+, which reported just shy of 158 million subscribers in May. (The Walt Disney Company is the parent company of ABC News).
Meanwhile, Netflix's free cash flow -- a measure of how much money is available to a company after it pays for operating expenses -- grew by $1.5 billion to a total of about $5 billion, the company said.
Despite the recent losses, Netflix stock has climbed roughly 44% this year -- a sign that the investor reaction this week suggests a judgment about an overvalued stock rather than an unhealthy company, Luis Cabral, a professor of economics and international business at New York University who focuses on the entertainment sector, told ABC News.
Still, the stock falloff is the latest sign of an industry-wide shift away from the breakneck subscriber growth that marked an early phase in the sector as companies jockeyed to accrue a large customer base that could shoulder out competitors, he said. Now, he added, companies like Netflix need to show that they're actually making money and delivering profits.
That means the companies are less likely to bankroll expensive shows or movies, she added. Some firms, including Netflix, have even imposed layoffs going back to last year as a means of cutting costs.
Viewers should expect a smaller selection of shows even after the calendar returns to normal following the strikes, she added. \"There was this rush to drive content over the last three to five years,\" she said. \"Everybody is going to pull back.\"
"We would remain on the sidelines until there is evidence that Netflix is a growth company once more," Pachter wrote, reiterating Wedbush's "neutral" rating and lowering the price target from $342 to $280 per share.
Netflix's moves to monetize password-sharers and roll out an ad-supported tier are unlikely to produce meaningful changes for its U.S. business in the near term, according to Neil Macker, senior equity analyst at Morningstar. The firm lowered its price target on Netflix shares from $305 to $280 per share, citing expectations for much lower subscriber growth in 2022 and slower margin expansion.
Previously, Netflix had not reported a drop in subscribers since the third quarter of 2011, which came after it split its DVD-by-mail and streaming services. The company's stock had previously had its biggest one-day percentage stock drop on Oct. 25, 2011, when shares fell 34.9% after Netflix reported a net loss of 800,000 customers.
Netflix share price fell as much as 6.8 per cent on Friday on NASDAQ following a surprising announcement that it would cease disclosing subscriber additions and average revenue per member starting in 2025.
The choice to withhold essential metrics that have influenced the stock market coincides with the anticipation among Wall Street analysts that subscriber growth for Netflix in North America and Europe is nearing saturation.
As per Blommberg report, the company approximated that over 100 million individuals were utilizing an account without payment. Despite concerns among Netflix executives regarding potential customer dissatisfaction, the company has successfully persuaded millions of freeloaders to subscribe and pay for access.
In the initial quarter, Netflix welcomed new customers; however, its revenue projection for the second quarter fell short of market anticipations, coming in below the expected $9.54 billion, as announced late Thursday. Additionally, the company opted not to disclose figures regarding subscriber growth and average revenue per member for the first quarter of 2025.
Netflix further reported that its ad-supported streaming options played a significant role in drawing in 9.3 million new customers, nearly twice the forecast agreed upon by analysts surveyed by LSEG. This surge brings the global subscriber count to 269.6 million by the end of March.
Netflix's stock has surged in recent months, currently trading close to the upper limit of its 52-week range. Analysts on Wall Street cautioned that the elevated expectations prior to the earnings report could pose a potential risk to the stock price.
In July 2024, reports alleging that Netflix's stock plunged after the company or its CEO donated millions to U.S. Vice President Kamala Harris' presidential campaign went viral. One outlet, The Dunning-Kruger Times, published an article specifically claiming the company's stock fell almost 40%, losing $2 billion in four hours, as as result. The article began:
You've probably already heard the news, patriots. Netflix, the company long associated with the Obamas, has gone fully woke and donated $7 million to the Kamala Harris campaign. In return, the American people canceled subscriptions at an alarming rate and the company lost billions in market cap overnight.
"I'm not so much questioning it as calling it complete and utter bullhonkey," said Barron, "Netflix couldn't care less if the MAGA cult that swore they canceled their subscriptions because Obama swear they're canceling them again. These aren't serious people. They're morons."
The posts alluded to a real donation: As Snopes reported, Netflix co-founder Reed Hastings told journalists he had donated $7 million of his money to a super PAC that supports Harris. (The streaming service itself did not make such a donation, and Hastings' contribution was not made directly to Harris' campaign. Hastings stepped down as Netflix's CEO in 2023 but remained its chairman.)
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Jonathan Friedland, the new vice president of global corporate communications who had joined Netflix just a few months earlier, asked whether customers on tight incomes might object to the price hike, according to people at Hastings' meeting. Hastings argued that Netflix was a great bargain. He said he knew that some customers would complain but that the number would be small and the anger would quickly fade.
Hastings was wrong. The price hike and the later, aborted attempt to spin off the company's DVD operations enraged Netflix customers. The company lost 800,000 subscribers, its stock price dropped 77 percent in four months, and management's reputation was battered. Hastings went from Fortune magazine's Businessperson of the Year to the target of Saturday Night Live satire.
To Hastings' credit, what he wanted to do made sense. The DVD's best days are behind it. Video streamed via the Internet is slowly replacing the physical disc, and betting a business on a dying product is never a great idea. So Hastings wanted to get ahead of the curve and focus on streaming, to disrupt his own business before someone else did it for him. It was aggressive, far-sighted, and very much in character.
Hastings is someone who knows a thing or two about disrupting businesses. Netflix, after all, is the company that drove the giants of video rental out of the sector with a simple premise: A simple-to-use Web site that delivers DVDs right to your doorstep. Best of all: No late fees. He became one of those executives with the "visionary" label, who can predict where a market is going before it happens, and was asked to join the board of directors of two of the most important companies in tech, Microsoft and Facebook.
Leading up to the first anniversary of the Netflix meltdown, CNET interviewed former and current Netflix employees to find out how a series of missteps turned into a lost year, and whether it has rebounded from those self-inflicted wounds. Most asked to remain anonymous. Netflix declined to comment for this story.
So how did Hastings stumble? Just prior to the attempt to remake Netflix into a streaming-video distributor, there was turmoil in the company's executive offices. Several of Hastings' most trusted lieutenants were no longer as influential with the CEO. Others had left and their replacements did not yet have the clout to convince Hastings he was being too aggressive for a customer base that by 2011 could hardly have been considered on the bleeding edge of consumer tech.
When customers and the press pushed back, the Netflix response was haphazard, culminating with an amateurish, confusing YouTube video heralding the coming of Qwikster, the spinoff that was supposed to be a life raft for Netflix's DVD operations. The Qwikster plan was scuttled three weeks after it was announced.
"Whatever happened to Fortune's Businessperson of the Year?" asks Wedbush research analyst Michael Pachter, referring to one of the many honors Hastings received in 2010. "Whatever happened to the guy who was invited to the boards at Facebook and Microsoft? What happened to that guy? Do you think Facebook would have invited him to their board now?"
Hastings has an unwavering belief that streaming video represented the future of home entertainment. He argued that in times of technological advancement companies that had succeeded at one business often clung too tightly to tradition and to what had made them successful. And then they were toast. He didn't want that to happen to Netflix. While few people disagree with that assessment, some within Netflix doubted Hastings' assessment of how quickly Netflix needed to shift to streaming.
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