What Happened:

Shares of streaming video giant Netflix (NASDAQ: NFLX) fell 5.9% in the pre-market session after the company reported second-quarter revenue that missed analysts' expectations, although operating income beat. The positive this quarter was a big beat on global streaming subscriber net adds. Guidance for next quarter calls for similar net adds compared to Q2, which is also slightly ahead of expectations. This puts a big dent in the bear case that with the password sharing crackdown and paid sharing rollout, customers would simply leave for another competing platform. Instead, they seem to be staying and paying. However, it was unfortunate to see that revenue missed. This was caused by revenue per subscriber figures that were below expectations globally. Additionally, the revenue guidance for the next quarter missed analysts' expectations, although the company is calling for acceleration in revenue growth as the year progresses and both account sharing and advertising contribute more to the topline. Operating margin for the upcoming quarter was ahead. Finally, Netflix now expects $5 billion of free cash flow in 2023 vs. $3.5 billion previously. This is due to lower content spend now that writers and actors are on strike, so while the upward revision is a positive, we don't see it as a longer-term, fundamental tailwind. In fact, should the writers and actors strike for longer than anticipated, it could actually hurt Netflix's content slate in 2024, although this headwind would be felt by competitors as well. The market was excited about advertising revenue from the company's ad-supported tier, but Netflix said that this revenue stream is not yet material, which is a slight disappointment. Overall, it seems to us that this was a complicated quarter for Netflix, and if we look at the stock's 60+% year-to-date move, the market was clearly pricing in a lot of good news.

What is the market telling us:

Netflix's shares are very volatile and over the last year have had 22 moves greater than 5%. In context of that, today's move is indicating the market considers this news meaningful but not something that would fundamentally change its perception of the business. The previous big move was 3 months ago, when the company dropped 12.5% on the news that reported slightly weaker-than-expected sales for the first quarter. In addition, it guided to weaker sales and operating profits for the next quarter vs. Consensus analyst expectations. The company also moved the wider rollout of its paid-sharing feature from late Q1 to Q2 (the revenue impact will come in Q3). The feature is intended to reduce password sharing, and analysts view it as a potential revenue tailwind.

Netflix is up 51.8% since the beginning of the year, and at $447.83 per share it is trading close to its 52-week high of $477.59 from July 2023. Investors who bought $1,000 worth of Netflix's shares 5 years ago would now be looking at an investment worth $1,240.

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