Netflix's advertising business is taking longer to scale than many analysts had predicted. And that concern has weighed on Netflix stock.
The subscription streaming video service late Thursday reported better-than-expected results for the second quarter. But it disappointed investors with its soft revenue guidance for the current quarter. Netflix also said advertising would not be a primary driver of revenue growth this year or even next.
On Friday, Netflix stock fell 1.5% to close at 633.34 after the Q2 report. But on the stock market today, Netflix stock rebounded, rising 2.2% to 647.50.
With the move higher Monday, Netflix stock climbed back to near its 50-day moving average line, a key technical trading level.
In its Q2 shareholder letter, Netflix said it is making "steady progress" in scaling its advertising business.
"Our ad revenue is growing nicely and is becoming a more meaningful contributor to our business," Netflix management said. "But building a business from scratch takes time — and coupled with the large size of our subscription revenue — we don't expect advertising to be a primary driver of our revenue growth in 2024 or 2025."
On a conference call with analysts, co-CEO Greg Peters said Netflix's ad business is still in the crawl phase of a crawl-walk-run trajectory. Netflix launched its advertising-supported service tier in November 2022 in 12 countries, including the U.S.
Netflix Stock Skeptics Need Proof
MoffettNathanson analyst Robert Fishman said Netflix will need to prove itself to convince the skeptics.
"It is up to Netflix to prove it can effectively scale its advertising business, but it will take time with the company admitting this won't be a primary driver of revenues this year or in 2025," Fishman said in a client note. "With impressions and inventory far outpacing ad sales, the onus is now on Netflix to build out its ad sales, measurement and tech capabilities necessary to grow this business for the long term."
Fishman rates Netflix stock as neutral with a price target of 570.
Needham analyst Laura Martin said Netflix's guidance implied that it plans to reach 20 million U.S. homes with its ad-supported service by the end of 2025. She called that target "aggressive."
"We believe advertising revenue growth is slower than Netflix planned," Martin said in a client note. The company's indication that ad revenues will not be material in 2025 was a negative surprise, she said.
Martin rates Netflix stock as buy with a price target of 700.
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