Netflix’s Q2 Results Don’t Support Stock Rally

The bulls are back in Netflix stock, even if the growth isn’t. Netflix on Wednesday reported just 2.7% higher revenue in the second quarter, below what it had projected, confirming that it’s now firmly in the class of slow-growing TV companies. Even excluding the impact of foreign exchange fluctuations, revenue grew just 6%—nothing to write home about. It’s a little hard to square that performance with a rally in Netflix stock that has lifted it 62% so far this year to its highest point since early 2022. In contrast, shares of Disney, one of its biggest rivals in streaming, have been flat, according to Koyfin data. True, Netflix generated free cash flow of $1.3 billion in the quarter. At a time when most other firms in the streaming market are burning cash like driftwood at a beach bonfire, Netflix’s profitability stands out. But investors rarely pay a premium for mature companies that are throwing off cash. If they did, a firm like Comcast would be much more of a winner on Wall Street than it is.

Investors are presumably upbeat about the opportunities Netflix has to accelerate growth. Most immediately, it is in the early phase of a password-sharing crackdown on freeloaders who borrow the logins of friends or family. While it only rolled out in May, already some freeloaders appear to be coughing up for their own accounts, as Netflix’s subscriber additions improved noticeably from the last quarter, to 5.89 million. In North America in particular, Netflix added more subscribers than in any quarter since the end of 2021. Netflix expects the crackdown’s impact to continue for several more quarters, speeding up revenue growth in the second half of this year. Fair enough—but make no mistake: This won’t last. Once all the cheapskates have been dealt with, the uplift in revenue from the crackdown will peter out.