Earnings season put the dumb in "tudum" for Netflix (NFLX -0.63%) investors this week. Shares of the leading premium streaming video service plummeted 8.4% on Thursday after the company posted mixed financial results for the second quarter. Netflix stock has still more than doubled over the past year.
Revenue fell short of Netflix's own guidance. A decline in revenue per subscriber also took some Netflix watchers by surprise. The streaming pioneer didn't live up to the hype, but the news wasn't all bad. Let's go over a few positive developments that bode well for Netflix shareholders following the stock's sharp drop on Thursday.
1. Streaming services are getting more expensive
You might not like hearing this as a consumer of streaming services, but the tolls are going up on your digital entertainment. The leading pay services either got more expensive this summer or are about to get more expensive later this year.
- Comcast (CMCSA 1.85%) announced this week that it's raising prices for Peacock Premium and Peacock Premium Plus by 20%.
- Paramount Global (PARA -2.22%) also increased prices for Paramount+ by 20% last month. The service now includes the Showtime streaming platform.
- Disney (DIS -0.04%) may or may not raise prices this summer, but it did say in May that its ad-free tier will get more expensive later this year.
Netflix, in a sense, also came through with a price hike of its own this week. It stopped selling its cheapest ad-free tier to new U.S. subscribers. The $9.99 a month basic plan is gone. The $6.99 ad-supported tier is there, but now the cheapest offering without marketing missives is the standard $15.49-a-month offering. The gap is a lot wider at Netflix now than its rivals, but that's because it suggested three months ago that it was more than making up the $8.50 difference through its ad revenue.
Higher prices will help Disney, Comcast, and Paramount eat away at their losses. It will only pad Netflix's profit.
Image source: Getty Images.
2. Netflix will weather the Hollywood strike better than its peers
One of the biggest changes at Netflix following Wednesday afternoon's report is that it now expects to generate $5 billion in free cash flow, up from the $3.5 billion it was targeting just three months ago. This may seem to be great news at first, but as management explained, this is the result of the shift in timing of production starts and the ongoing WGA and SAF-AFTRA strikes that have halted new content.
The extra $1.5 billion in free cash flow shouldn't be celebrated. Netflix will miss some of the new content it was hoping to deliver to its subscribers, and the striking parties are out of work. However, it also shows how Netflix is better suited to tackle this situation than the media networks-backed platforms that live and die based on fresh fall programming. Netflix continues to be a hotbed for international, reality, and live content. The eventual lull in new content will make it hard for rivals to justify their higher price points. Netflix should fare relatively better.
3. Netflix has thrived after previous post-earnings dips
Netflix stock also took a step back after putting out a poorly received first-quarter report in April. It was just a 3% decline the day after the results came out, but Netflix stock would go on to soar 48% before -- yes, 48% -- before Thursday's hit following its Q2 update.
History doesn't have to repeat this time. However, we've already see this year how Netflix can recover bullishly after a bearish initial reaction to fresh financials. Betting against the top dog of streaming services stocks has historically been an ill-advised wager.
