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Netflix shares sink as Wall Street seeks clarity on revenue growth

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Netflix shares fell more than 9% on Thursday after a quarterly earnings report that was largely upbeat but left Wall Street unhappy and uncertain about underlying revenue drivers.

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

Netflix provided few details about those initiatives in its quarterly report on Wednesday, 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.

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Netflix shares rose on the back of the rollout of ad-supported streaming and a new password-sharing policy that should boost revenue.

In the most recent quarter, Netflix’s average revenue per membership showed weakness as the streamer focused on its stated revenue drivers rather than price increases. This week, the company removed its least expensive ad-free plan to allow customers to opt for a cheaper ad plan.

CFO Spencer Neumann said during Wednesday’s earnings call that price increases have been put on the back burner with the introduction of the new sharing policy. The company expects a “gradual increase in revenue,” he said, adding that “it won’t be a big contribution 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 its total subscribers, The Information reported Wednesday.

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

“Most of our revenue growth this year has come from volume growth from new paid memberships, and that’s largely driven by our paid exchange rollout,” Neumann said. “This is our primary revenue acceleration for the year, and we expect that impact … to be compounded over several quarters.”

But with uncertainty about how long it will take for revenue-generating initiatives to take hold, it’s difficult to predict Netflix’s earnings in the next two years, making the future murky, according to Wall Street analysts.

“Customer expectations are high,” Wells Fargo analyst Steven Cahall said in a note ahead of Netflix’s earnings report on Wednesday.

However, in a post-earnings note, Cahall said “patience is a virtue” and called out investors who are “over-excited about fee-based exchanges”, noting that earnings growth will take longer.

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

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

The streaming giant fared better than its legacy media rivals, with subscriber growth showing its strength as others struggle and prepare 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 its first subscriber loss in a decade last year sent its shares tumbling, the company said it would shift its focus to revenue growth and forecasts.

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