Netflix's second-quarter performance fell short of expectations, but its subscriber base saw significant growth. The stock dropped 8.13% after hours.

According to the information obtained from the Zhītōng Finance and Economics app, Netflix (NFLX.US) reported second-quarter revenue of $8.19 billion, which was lower than analysts' expectations of $8.30 billion. It is expected that third-quarter revenue will increase significantly by 7.5% year-on-year to $8.52 billion. However, due to exchange rate fluctuations and the impact of reduced subscription fees in certain regions, this guidance is still lower than the market's expectation of $8.67 billion. Netflix's crackdown on password sharing and the initial success of its ad-supported subscription service have resulted in a net addition of 5.89 million paid users in the second quarter. This not only significantly exceeds the first-quarter level but also far surpasses the market's expectation of 2.07 million, setting a new record for user growth in the second quarter since the outbreak of the pandemic. It is worth noting that Netflix added 5.90 million subscribers this quarter, indicating that its two main initiatives, cracking down on password sharing and launching a cheaper $6.99/month ad package, have attracted new subscribers. Netflix added 1.20 million subscribers in the United States and Canada this quarter, achieving the largest regional quarterly growth since 2021.

However, the situation in other media industries is not the same. Disney (DIS.US) and Warner Bros. (WBD.US) have found that cutting content in their streaming services can avoid paying copyright and licensing fees. These two companies have laid off thousands of employees in the past 12 months to improve free cash flow. Paramount+ (PARAA.US) and NBCUniversal, owned by Comcast (CMCSA.US), have both stated that 2023 will be the biggest annual loss in their streaming business history.

At the same time, Netflix has raised its free cash flow estimate to $5 billion. Previously, the company expected to have $3.5 billion in free cash flow, but the strike by actors and writers will reduce content expenses. This means that Netflix will actually have more cash than previously expected.

In the next quarter, Netflix predicts that subscriber additions will reach around 6 million again. The company stated that with the steady growth of its crackdown on password sharing and the ad-supported plan, revenue in the second half of the year will accelerate, achieving "comprehensive benefits."

Last year, Netflix's valuation dropped by 60% due to stagnant growth in streaming subscribers. The company spent a lot of time during the earnings conference call focusing on explaining its new gaming business, which was launched in mid-2021 to help kickstart a new growth story. However, the shareholder letter for this quarter hardly mentioned video games. This is because, unlike other companies in the media industry, Netflix doesn't need a new story. The old story still works. Streaming is growing, cash reserves are increasing, and the advertising business is attracting investors. Netflix has a stable international content pipeline and a deep content library, which can withstand long editing and actor strikes.

Ross Benes, an analyst at research firm Insider Intelligence, said, "The lack of mention of video games in the shareholder letter indicates that advertising is the shiny object that most attracts the company's attention." Netflix's stock price fell by 8.13% after the market closed. This is more of a profit-taking behavior after the company's significant increase this year (up more than 62% as of Wednesday's close), rather than anything to be angry about in its initial quarterly data. After experiencing a sharp decline last year, the company has returned to the right track.