Netflix reports strong Q2 earnings with 34% ad-tier membership growth, but stock falls

Netflix Inc. (NASDAQ: NFLX) posted impressive second-quarter results that exceeded market expectations, but its stock is experiencing a dip in after-hours trading. 

The streaming giant’s robust financial performance was significantly buoyed by the success of its ad-supported tier memberships, highlighting its strategic shift in revenue generation.

In Q2, Netflix reported earnings of $4.88 per share on revenues of $9.55 billion, surpassing analyst predictions of $4.74 per share and $9.53 billion in revenue. 

The company’s strong quarterly performance was driven by the popularity of series and films like “Bridgerton,” “Queen of Tears,” “Hitman,” and “Under Paris.” 

The addition of 8.05 million new subscribers pushed the total to 277.65 million, exceeding the Street’s estimate of 274.4 million. 

Consequently, Netflix’s stock has surged approximately 35% since the beginning of 2024.

Ad-tier memberships and revenue growth

Netflix’s growth was not only attributed to its existing content but also to the substantial progress in its ad-supported tier. 

The company reported a 34% sequential increase in ad-tier memberships, reflecting a steady expansion of its advertising business. 

This growth is part of Netflix’s broader strategy to diversify its revenue streams, which includes introducing live sports to attract more advertising dollars.

In its quarterly report, Netflix outlined plans to develop an “in-house ad tech platform” to enhance its advertising capabilities. 

The platform is expected to be tested in Canada later this year and launched globally in 2025. 

Despite these advancements, Netflix’s stock faced pressure due to its cautious guidance for Q3, anticipating a decrease in paid net additions compared to the previous year.

Netflix Q2 earnings snapshot

For the second quarter, Netflix reported:

Revenue: $9.55 billion, a 16.8% increase year-over-year, exceeding the consensus estimate of $9.53 billion. Earnings per Share (EPS): $4.88, up from $3.29 in the previous year, surpassing the anticipated $4.74. Operating Margin: 27.2%, an improvement from 22.3% a year ago, with expectations to maintain around 26% in 2024.

Netflix’s management reiterated its commitment to expanding its entertainment offerings and improving user engagement to sustain revenue and profit growth. 

The company is pivoting from a high-growth, low-profit model to a more sustainable, high-profit strategy.

Is it a good time to buy Netflix stock on the dip?

As Netflix prepares to halt the disclosure of quarterly subscriber numbers and average revenue per user (ARPU) starting next year, analysts at Wedbush Securities view this move as indicative of the company’s shift in focus. 

Despite Netflix’s leading position in the streaming industry, this strategic pivot is still underway.

For investors, the recent dip in Netflix’s stock presents a potential buying opportunity. 

Wedbush Securities projects a price target of $725 for Netflix shares, reflecting a possible increase of over 10% from current levels. 

Morgan Stanley also adjusted its price target upward in anticipation of Netflix’s Q2 results, signaling confidence in the company’s long-term prospects.

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