Key Points
This wasn’t the movie they wanted to watch.
Netflix (NASDAQ:NFLX) published its second-quarter results after market close on Thursday, and after-hours traders reacted by selling out of the streaming giant’s stock. It was down by 9% late that evening; let’s unpack the reasons why.
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Record numbers
Netflix booked revenue of $12.56 billion, for year-over-year growth of 13% (it was also a record quarterly high, by the way). The company’s net income under generally accepted accounting principles (GAAP) grew more modestly, rising just shy of 9% to a bit over $3.4 billion, or $0.80 per share.
Neither metric was too far off its consensus analyst estimate. Prognosticators tracking Netflix stock were collectively forecasting $12.58 billion on the top line, and $0.79 per share for GAAP net income.
The company’s performance was also in line with its own expectations, it stated in its earnings release. It added that the growth in headline metrics was due to a cocktail of higher pricing (the company raised its fees for all three of its membership tiers in late March), an increase in total members, and higher advertising revenue.
Netflix also didn’t hesitate to note that this growth occurred across all its regions. In fact, it also notched a new all-time high quarterly revenue figure in Europe, the Middle East, and Africa of $4 billion. Ditto for the almost $1.6 billion it earned in Latin America and the just over $1.5 billion take of Asia-Pacific.
Overall, in the release, Netflix sounded rather satisfied with its performance. Not surprisingly, the company indicated it’ll stick to its current, three-tiered strategy of improving the quality, quantity, and variety of its content, leveraging technology to deliver what it describes as “more personalized,
immersive, and interactive experiences for our members,” and getting more out of its monetization efforts. The latter particularly applies to its advertising efforts, but also covers pricing.
Guidance misses
Given Netflix’s size, reach, and prominence, those trailing growth figures weren’t half bad. Yet as any savvy investor knows, stocks trade more on future potential than trailing results. And that, as they say, was the rub for the company.
It proffered fresh guidance for its current (third) quarter and adjusted its full-year projections. For the former period, it expects to earn $12.86 billion in revenue, which, if achieved, would mean year-over-year growth of almost 12%. Net income is forecast to be $3.45 billion ($0.82 per share), for anticipated improvement of 36%. While that sounds high, third-quarter 2025 profitability was hurt by a $619 million tax expense incurred by its Brazil operations. Unfortunately, both estimates fall just under the consensus analyst estimates of $13 billion on the top line and $0.84 per share for GAAP net income.
As for that full-year guidance, Netflix narrowed its projection for revenue. It now believes this will land at $51 billion to $51.4 billion; the preceding range was $50.7 billion to $51.7 billion.
Look at the long term
While none of the historical or guidance whiffs were drastic, they were whiffs nevertheless. That alone tends to discourage investors, and the dynamic is particularly acute with Netflix.
The company’s dogged yet ultimately failed pursuit of storied Hollywood entertainment conglomerate Warner Bros. Discovery (NASDAQ:WBD) is still fresh in the minds of many market players. We’re also in an era of intense competition in the streaming space, with new content and services popping up constantly. Netflix remains a compelling destination for those seeking entertainment, but there are an increasing number of smart and determined rivals that can poach precious viewer time. It feels to me that the company’s investors are hungry for a big, tangible win, and with this earnings report, they didn’t really get one.
That doesn’t make this stock a sell for me, though. I feel Netflix has actually done a fine job of broadening its already daunting content lineup, capturing large-scale viewership for offerings like World Wrestling Entertainment and live “legitimate” sports (not long ago, it signed deals with both Major League Baseball and the National Football League). There’s a lot of action and noise in the streaming world right now, and much jostling for attention in a temptingly immense market. More than most other streamers, I’d say, Netflix is positioning itself to be compelling for many types of viewers, and has the resources to continue doing so.
I think Thursday’s after-hours investor reaction was overblown, and I’d expect Netflix stock to recover once the market recognizes the company’s high value as an elite-level streamer and a long-term growth story.
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Eric Volkman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Netflix and Warner Bros. Discovery. The Motley Fool has a disclosure policy.
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