Netflix Shares Come Under Further Pressure
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Netflix did not report weak results, but this time, performance broadly in line with expectations was no longer enough for investors. The third-quarter guidance points to a slowdown in growth, while questions have also emerged regarding time spent on the platform. Nevertheless, the fundamentals remain intact: advertising revenue is growing rapidly, price increases are proving effective, and live events and new content formats could create additional revenue streams — albeit primarily over the longer term. The 9% decline is certainly painful and appears to reflect a sharp correction in elevated expectations. For now, however, the fundamentals do not suggest that the company’s long-term investment case has been broken.
Earnings report
Netflix shares have performed very poorly on the stock market recently, despite no visible deterioration in the company’s fundamentals. Second-quarter revenue increased by 13% to USD 12.56 billion. The market had expected revenue of approximately USD 12.58–12.59 billion, meaning the shortfall amounted to only a few tens of millions of dollars and cannot be considered material in itself. EPS came in at USD 0.80, slightly ahead of the USD 0.79 consensus estimate.
The primary reason for the sharp decline in the share price—down 9% in pre-market trading—was the company’s guidance for the third quarter. Netflix expects revenue of USD 12.86 billion, which would represent growth of approximately 12%. The consensus estimate, however, was closer to USD 13 billion. EPS is expected to be around USD 0.82, below the market forecast of USD 0.84, while the operating margin is projected at 33.2%, compared with the 33.5% consensus estimate.
The company narrowed its full-year revenue guidance range from USD 50.7–51.7 billion to USD 51.0–51.4 billion. The midpoint of the range remained broadly unchanged, meaning that this was not a revenue warning in the traditional sense. However, some of the upside embedded in the previous guidance has been removed. Management continues to expect revenue growth of 13–14% and an operating margin of 31.5% for the full year 2026.
Management attributed the expected slowdown in the third quarter to tougher year-on-year comparisons, as growth was stronger in the second half of last year. The company also stressed that new subscriber acquisition and retention remain healthy, while the impact of this year’s price increases has been consistent with previous pricing cycles.
Nevertheless, the market is now primarily trying to determine whether Netflix’s longer-term organic growth rate is gradually moving down from the mid-teens towards lower levels. The third-quarter guidance did not provide enough support to reverse the negative momentum surrounding the shares—particularly as investors had previously grown accustomed to Netflix beating consensus expectations and raising its full-year guidance.
For the time being, we are keeping Netflix on our Equity Top Pick List. However, we will continue to monitor company-related developments closely and take action if necessary.
Questions Surrounding Viewer Engagement
User engagement remains an important issue for the company. Netflix viewers consumed more than 97 billion hours of content in the first half of 2026, representing a 2% increase from a year earlier. This, however, can hardly be described as exceptional growth.
Moreover, the company announced that from 2027 onwards, it will publish its detailed What We Watched report only once a year, compared with twice a year previously. Through this change, Netflix wants investors to focus primarily on revenue and operating profit during earnings season. The timing, however, is less than ideal. With the market increasingly questioning engagement trends, less frequent disclosure is more likely to increase uncertainty than reduce it.
Management argued that not every hour viewed carries the same economic value. Live content may account for approximately 5% of the content budget this year, while generating only 1% of total viewing hours. By contrast, children’s and family animation could account for nearly 8% of viewing hours with a similar share of the content budget. Live events, however, have a much greater impact on subscriber acquisition, advertising revenue and the broader public conversation around Netflix. Six of the company’s ten strongest subscriber sign-up days over the past five years were linked to live events.
Beyond TV shows
Netflix confirmed that advertising revenue could reach approximately USD 3 billion this year, which would represent a near doubling year on year. The US upfront negotiations are at an advanced stage, while advertisers are showing strong demand for inventory around live programming, including NFL, WWE and MLB events. According to management, the price increases implemented in the United States, Mexico and Spain during the first half of the year have performed in line with previous pricing cycles. The company has not observed any meaningful change in customers’ tolerance for price increases, while subscriber retention remains exceptionally strong by industry standards.
Netflix is placing increasing emphasis on live events, which can attract significant numbers of new subscribers and generate substantial advertising revenue despite accounting for fewer viewing hours than traditional films and series. The World Baseball Classic, for example, became the most-watched programme in Netflix’s history in Japan. The event drove a visible increase in new subscriptions, although these customers subsequently exhibited somewhat higher churn rates.
In our view, this strategy can work well as long as Netflix remains selective in acquiring sports rights. The company does not need to build a year-round programming schedule similar to that of a traditional sports network. Securing a limited number of high-profile events may be sufficient to attract large numbers of new subscribers over a short period, create exclusive advertising inventory and support the promotion of other content.
The gaming business remains small, but some positive signs are beginning to emerge. Video podcasts and vertical video could also provide new growth opportunities, particularly on mobile devices and during daytime hours, when Netflix has traditionally been less dominant. According to management, podcasts are not intended to replace prime-time viewing of films and series. Instead, they could generate incremental screen time for the platform. This is important because Netflix is no longer competing solely with Disney or HBO. It is increasingly competing with YouTube, TikTok and Spotify for users’ leisure time and attention.
Numerous acquisition rumours have surrounded Netflix in recent months. However, management continues to emphasise that it views Netflix primarily as an organically growing company rather than an acquisitive one. Although smaller acquisitions and partnership agreements have not been ruled out, management continues to apply demanding return thresholds to any potential large-scale transaction.
Management executed a record USD 4.7 billion of share repurchases during the quarter, while approximately USD 27 billion remains available under the company’s existing buyback authorisation. This indicates that management remains confident in Netflix’s long-term outlook and supports the view that the company is not currently preparing for a major acquisition.
Investment case
- Netflix remains the leading player in the global streaming market, supported by strong pricing power and industry-leading customer retention.
- Advertising revenue could nearly double this year, although it is not yet large enough to become the company’s primary growth engine on its own.
- Despite accounting for a relatively small share of viewing time, live events are proving to be effective tools for subscriber acquisition and advertising revenue generation.
- An operating margin above 30% and substantial share repurchases continue to support the company’s long-term investment case.
- Risks: Netflix is no longer competing only with traditional streaming platforms. It must also compete with YouTube and social media platforms for users’ screen time. This has raised questions about the level of organic growth the company can still achieve.
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