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Netflix subscribers surged but its stock plummeted. Here’s why.


(NEW YORK) — Netflix revealed blockbuster subscriber growth in a quarterly earnings report this week, but since then the company’s shares have plummeted more than 20%.

The reaction on Wall Street marks the latest indication of a profound shift in investor priorities away from subscriber growth and toward the bottom line, which holds implications for striking writers and actors as well as the shows and movies that end up on screen, experts told ABC News.

“The tide has turned,” Jessica Reif Ehrlich, an entertainment industry analyst with Bank of America, told ABC News.

Netflix did not immediately respond to a request for comment.

Here’s what to know about what the earnings report said, why the stock price fell and what it means for Hollywood.

What did Netflix earnings reveal about the company?

Netflix shared a lot of good news in its earnings report on Wednesday, Reif Ehrlich said.

A password-sharing crackdown helped the streaming platform add 5.9 million subscribers over the three months ending June, which marked a staggering improvement from the same period a year ago when the company lost nearly 1 million subscribers, Netflix said.

In all, Netflix said it boasts about 232 million subscribers, far outpacing its nearest rival Disney+, which reported just shy of 158 million subscribers in May. (The Walt Disney Company is the parent company of ABC News).

Meanwhile, Netflix’s free cash flow — a measure of how much money is available to a company after it pays for operating expenses — grew by $1.5 billion to a total of about $5 billion, the company said.

The company, however, failed to meet expectations for revenue, which rose 2.7% from a year earlier to $8.2 billion. Analysts expected $8.3 billion.

Why did Netflix’s stock drop?

The miss on revenue — which Reif Ehrlich called a “modest disappointment” — was enough to send the company’s stock tanking.

The subscriber growth, while strong, is poised deliver less than it appears because many of the consumers live in international markets where the company reaps less revenue per customer, she added.

On Thursday, a day after the report, Netflix shares fell more than 8%. In afternoon trading on Friday, the stock had dropped roughly another 11%.

Despite the recent losses, Netflix stock has climbed roughly 44% this year — a sign that the investor reaction this week suggests a judgment about an overvalued stock rather than an unhealthy company, Luis Cabral, a professor of economics and international business at New York University who focuses on the entertainment sector, told ABC News.

“From the beginning of the year, it’s actually doing quite well,” Cabral said.

Still, the stock falloff is the latest sign of an industry-wide shift away from the breakneck subscriber growth that marked an early phase in the sector as companies jockeyed to accrue a large customer base that could shoulder out competitors, he said. Now, he added, companies like Netflix need to show that they’re actually making money and delivering profits.

What does Netflix’s stock decline say about the streaming industry?

The focus on bottom-line performance means streaming companies like Netflix are increasingly attentive to minimizing costs and enhancing the revenue derived from viewers, Reif Ehrlich said.

That means the companies are less likely to bankroll expensive shows or movies, she added. Some firms, including Netflix, have even imposed layoffs going back to last year as a means of cutting costs.

The ongoing strike among writers and actors adds an additional layer of financial uncertainty, she added.

“Given the strikes and the focus of the market on profitability, they’re really going to have to think about content costs, marketing costs, overhead,” Reif Ehrlich said.

Viewers should expect a smaller selection of shows even after the calendar returns to normal following the strikes, she added. “There was this rush to drive content over the last three to five years,” she said. “Everybody is going to pull back.”

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