Netflix posts strong earnings report, but share price remains muted

Streaming giant Netflix has reported stronger earnings for Q2, and has raised its full  year revenue forecasts, as it benefited from a weaker dollar and strong subscriber growth, and a doubling in advertising revenue.

Earnings per share beat estimates last quarter, and rose to $7.19, estimates were for a reading of $7.06. Revenues rose by 16% last quarter, and even though this looks like a solid earnings report, Netflix’s share price was lower in the post market, and fell more than 1% in after-hours trading. Investors may have been disappointed that the full year revenue outlook was not revised even higher.

Strong content slate to keep costs elevated in H2

The company reported that shows including Sirens, the most recent series of Squid Game and Secrets We Keep, had all boosted revenues. Sirens had 56 million views, while Dept. Q in the UK had 28 million views. They also highlighted some of the shows that they hope will be blockbusters in the second half of this year, including a new version of Frankenstein, the Stranger Things finale and Wednesday 2.

Netflix to continue to back local content in era of tariffs

The company reminded analysts that it is not reliant on one show to boost engagement, and even the biggest titles, which have millions of views, account for a mere 1% of total views in Q2. Netflix will maintain its ‘local for local’ content strategy and develop shows that will connect with local audiences. While this is no doubt more costly, it does give Netflix an advantage over some of its other rivals that stick to US-based content and helps to boost subscriber numbers.

The company is expecting revenue growth of 17% in Q3, driven by subscriber growth, advertising revenue and higher prices. However, the company also expects costs to rise in the second half of the year, which could weigh on operating margin. This is typical for Netflix, as the bulk of its new content is released later in the year, which boosts costs and sales and marketing  spend is typically bigger in the second half of the year compared to the first half.

Netflix gives a nod to Trump’s made in America programme

Perhaps in a nod to President Trump, Netflix was keen to point out that its most significant investment remains in the US, which accounts for the bulk of content spend, workforce and production infrastructure.  The company estimates that it contributed $125bn to the US economy between 2020 – 2024.

Earlier this year, President Trump threatened to add tariffs to imported video content, which would hurt the major streaming companies. Although this has not been mentioned since, Netflix is likely attempting to follow a narrow path to avoid inciting the wrath of the White House.

Netflix valuation hinder stock price reaction to earnings report

Overall, the muted response to Netflix’s share price on the back of this earnings report may be down to its lofty valuation. The 12-month forward Price to Earnings ratio for is 45.13. times earnings. Thus, it is no wonder that investors are getting picky about revenue forecasts and are demanding ever higher upgrades to justify buying a stock at this elevated price. However, the average move in Netflix’s stock price 24 hours after an earnings report is more than 8%, so we will see if there is a delayed reaction later on Friday.

Strong earnings reports so far not leading to outsize gains for equities

At this early stage of earnings season, sales and earnings growth are rising, and there have been more positive surprises than negative surprises. However, the stock market reaction has been muted and, so far, the S&P 500 is only higher by 0.5% in the last five trading sessions. Moves for the biggest companies’ share prices post the earnings report are well below the average move 24 hours after an earnings release. For example, JP Morgan’s share price is higher by 1.5% this week, even after reporting a stellar earnings report for Q2, lower than the average move after an earnings report, which is 2.6%.

Overall, earnings season will get into full swing in the coming weeks. So far, although companies suggest that the US economy remains resilient, elevated stock prices are hindering the market reaction.