Key Points
- Netflix is facing a crucial test to prove its new strategies can support future growth.
- The company is making big, costly investments in video games and an ad-supported tier.
- So far, the video game push has had a minimal impact on user engagement.
- The ad-supported tier attracts new users, but its revenue contribution is still small.
Netflix’s stock has been on a tear, adding a massive $120 billion to its market value. But now comes the hard part. When the company reports its third-quarter earnings on Tuesday, it will have to prove that its costly new bets on advertising and video games can deliver the kind of growth that made it a Wall Street superstar in the first place.
On the surface, things look good. A strong lineup of shows, including its most successful movie, “KPop Demon Hunters,” is expected to give Netflix its fastest revenue growth in over four years. But under the hood, there are some growing concerns.
The company’s decision to stop reporting its subscriber numbers earlier this year has put a new focus on its other ventures. The biggest is video games, a business that Netflix has poured about $1 billion into. But so far, the bet hasn’t paid off. After four years, video games have boosted users’ time on the platform by less than half a percent.
The other big bet is the company’s new ad-supported subscription tier. While the plan is attracting many new subscribers, its contribution to the company’s bottom line is still small.
For now, investors are giving Netflix the benefit of the doubt, buoyed by the strong performance of its core streaming business. But as one portfolio manager said, “We will certainly want to see that develop over the next couple of quarters.”
