With June 30 now behind us, investors are digging through the second-quarter financials of hundreds of companies to assess their progress, particularly given this uneven and uncertain economic environment. Earnings season often delivers surprises both good and bad, but investors weren't impressed by the results from two popular technology companies specifically.
Netflix (NFLX -0.63%) and Spotify (SPOT 0.20%) saw their share prices tumble following the release of their financial results for the quarter ended June 30. Here's why.
1. Netflix: Subscriptions soared, but revenue lagged in Q2
July was a flat month for shares of Netflix, but they had climbed by as much as 8% before the company reported its Q2 financial results on July 19. The streaming giant has deployed new strategies to acquire subscribers, including an advertising-supported tier at a cheaper price point, and a crackdown on password sharing. But while they both yielded results, it didn't translate to an acceleration in revenue growth in Q2.
Password sharing has been a particularly difficult challenge for Netflix to overcome, because it estimates there are 100 million households worldwide enjoying a free ride using someone else's account. Those are users who already love the streaming platform, so the company is now forcing them into becoming paying customers. They can be added to an existing plan for $7.99 per month, rather than paying the full $15.49 for a standard plan or $19.99 for a premium plan.
Netflix's advertising tier is also gaining momentum. It's priced at just $6.99 per month, but the company says it's more lucrative than the $15.49 tier thanks to ad revenue. As a result, the company just extinguished its $10.99 basic plan to entice users into the cheaper option, which is a win-win for all parties.
Wall Street analysts expected Netflix to acquire 1.7 million subscribers in Q2, but it blew that number out of the water by adding 5.9 million. The company's total subscriber base came in at 238 million, up 8% year over year, which marked an acceleration from the 5.5% growth rate it delivered in Q2 2022. In short, the company's new growth initiatives are working.
However, Netflix's revenue grew by just 2.7% year over year to $8.2 billion, which was a notable slowdown from its 8.6% growth rate a year ago. It was also less than the $8.3 billion Wall Street expected. It appears most of the platform's new subscribers came from the crackdown on password sharing, so they're only contributing $7.99 per month, which is now Netflix's least-lucrative user cohort. Therefore, the acceleration in subscriber growth didn't translate to an equal result on the revenue side.
It's becoming clear Netflix's new initiatives might only lead to incremental growth over time, and the days of consistent double-digit percentage increases in revenue might be behind this company. As a result, investors sold Netflix stock following its Q2 report, sending it plunging almost 11% from its July peak.
2. Spotify: Q2 revenue missed expectations and losses widened
Spotify stock has surged 81% so far in 2023, but it was doing even better prior to the release of its second-quarter financial results on July 25. The stock price sank by more than 7% for the month as investors digested a revenue number that was lighter than expected, combined with a blowout net loss.
Spotify is the world's largest music and podcast streaming service. The industry is extremely competitive, and it's tough for the largest players like Spotify, Apple Music, and Amazon Music to differentiate their services because they offer very similar content. But Spotify has invested heavily in technology, especially artificial intelligence (AI), to build an unrivaled user experience.
The company continues to roll out AI DJ to premium subscribers, which takes algorithm-based content recommendations to a new level. Spotify has used AI for a while to learn what listeners like in order to curate new playlists for them to drive more engagement. But AI DJ picks songs, plays them, and uses a software-generated voice to commentate throughout the process. Plus, every single user will have a different experience because their preferences and tastes are unique.
Spotify told investors it expected to acquire 15 million new subscribers in Q2, but it trounced that number by adding 36 million. It took the company's total monthly active user base to 551 million, up 27% year over year. Spotify has premium users who pay a monthly subscription and free users who simply endure advertising between songs. The company suffered a similar challenge to Netflix during the quarter, in that the majority of its growth came from its free users, which accounted for 26 million of the 36 million new additions.
The free, ad-supported users monetize at a substantially lower rate. In Q2, Spotify had 220 million premium users who accounted for 87% of its total revenue, whereas the 343 million ad-supported users accounted for just 13%.
As a result, despite growing its user base far more quickly than expected, Spotify's Q2 revenue increased by just 11% to 3.18 billion euros, which was short of Wall Street's expectations of 3.21 billion euros. Plus, the company is ramping up its investment in research and development, which led to a net loss of 305 million euros, more than double the 125 million euros it lost in Q2 last year. This comes at a time when many tech companies are carefully managing costs given the tough economic environment.
To top things off, Spotify expects to add 21 million new users in the upcoming third quarter, with just 4 million being premium subscribers. That would mark a notable slowdown from the Q2 result on both counts. The culmination of the above factors left investors heading for the exits in July.
