Netflix's Q2 Earnings: Strong Performance, AI Integration, and Adtech Expansion

Netflix's Q2: big profit, bigger ambitions, and a small stock fall

For a company that is built on plot twists, Netflix's latest earnings were pretty on-script -- maybe too on-script, if you ask Wall Street. The streaming giant posted a huge second quarter: Revenue jumped 16% to $11.08 billion, net income soared 46% to $3.13 billion, and EPS crushed expectations at $7.19 a share. The company even nudged its full-year outlook higher, thanks to booming global subs, surging ad sales, and a weak U.S. dollar that makes international earnings sparkle. But Netflix stock slipped around 5.4% in early trading on Friday, after falling around 2% in after-hours trading. The message from investors? That was a great quarter. Now what? Despite the upside beat and raised guidance, there's a mismatch between what Netflix delivered and what its valuation assumes. The company's market cap is north of $540 billion, and it trades at a hefty forward earnings. That's elite territory, meaning Netflix has to keep outperforming just to hold its ground. And this quarter, the tone was a little too cautious for comfort. The earnings themselves were solid across the board. Ad revenue is on track to double this year, subscriber retention seems to have stayed strong despite price hikes, and revenue per user in North America accelerated to 15% growth from 9% the prior quarter. Even free cash flow nearly doubled from a year ago. "Netflix continues to produce phenomenal results with ever more growth in its sights," Wedbush analyst Alicia Reese wrote in a Friday note. She said the streamer's next episode is "more growth" and reiterated an "Outperform" rating. Wedbush wasn't the only firm to still see plenty of runway ahead. Jeffries called the quarter "solid." William Blair said it was a "good quarter." Piper Sandler, Morgan Stanley, Wells Fargo, and Jefferies all raised their targets to the $1,500-1,560 range, pointing to Netflix's expanding ad business, pricing power, and the effects of reinvesting profits into premium content and tech. UBS lifted its price target by $45 to $1,495, writing that the company sees Netflix "as a secular winner." The average price target is hovering around $1,400 -- shares reached a high on June 30 at $1,339. Netflix's ad-supported tier is expected to generate around $2 billion in revenue next year and is a critical growth driver. The company completed the rollout of its proprietary ad tech this quarter -- a key milestone to unlocking growth and one of William Blair's three big takeaways from the second-quarter earnings. Analyst Ralph Schackart wrote in the company's note that "this is important, in our view, because advertisers we speak to still suggest that Netflix's ad technology needs improvement." Still, Morgan Stanley analyst Benjamin Swinburne said the expanding ad business is a "multiple upside lever" alongside Netflix's traditional subscription model. JPMorgan, however, struck a more cautious tone. It reiterated a neutral rating -- setting a $1,300 price target -- and said Netflix's results and improved outlook were "solid against high expectations." But amid the company's valuation premium, the shares, analysts also said, "need a breather." Netflix is feeling the heat from YouTube, which has upped its share of U.S. screen time to 12% so far this year -- Netflix sits at 8%, steady from last year's 8%, while YouTube climbed from 10%. With Netflix betting big on ads, investors want to see if it can speed up viewing hours and start closing that gap. Jeffries said the company's second-half lineup is a big part of that plan, but so are moves into sports and live events, shorter-form stuff like 15-20 minute videos (think YouTube-style), and even video podcasting. Netflix struck a high-profile licensing deal with Ms. Rachel, the preschool educator whose YouTube sing-along videos have become appointment viewing for millions of families. Under the agreement, Ms. Rachel's existing videos will be licensed nonexclusively to Netflix (initially four "curated compilation" episodes, with additional releases planned), giving the platform a powerful offering in the under‑6 market. "Not everything on YouTube will fit on Netflix," co-CEO Ted Sarandos said on the post-release earnings call. "But there are some creators on YouTube like Ms. Rachel that are a great fit." Sarandos added that Netflix is "really excited about ... a wide variety of creators and video podcasters that might be a good fit for us, and particularly if they're doing great work and looking for different ways to connect with audiences." On the live and sports front, Netflix isn't rushing to chase every shiny event -- even as the company attempts to plant a flag in linear TV's last stronghold. Netflix remains "focused on ownable big breakthrough events that... our audiences really love," Sarandos said, while stressing that anything in the event or sports space "has got to make economic sense." For now, live content accounts for a small slice of both Netflix's content budget and its massive 200 billion total view hours. Still, Sarandos said live programming punches above its weight -- "not all view hours are equal," he said, "and what we've seen with live is it has its outsized positive impacts around conversation, around acquisition, and we suspect around retention." The company's coming calendar includes the Canelo vs. Crawford fight in September, the SAG Awards, weekly WWE matches, and an NFL Christmas Day doubleheader. So far, Netflix's live events have been mostly U.S.-centric, but the company plans to "continue to invest and grow our live capabilities for events around the world in the years ahead," Sarandos said. For now, the strategy remains steady, focused, and measured. Live is a tool, not the whole playbook. What's gnawing at investors is what comes next. On top of its coming live events, Netflix is betting big on a stacked content slate for the next couple of quarters, with season two of "Wednesday," the final season of "Stranger Things," "Happy Gilmore 2," the latest "Knives Out" movie, and Guillermo Del Toro's "Frankenstein" all landing. Jeffries said that this slate was "exceptional" and that it "expect[s] this to support healthy member growth" through the second half of the year. But all of that content is expensive, and Netflix warned that operating margins in the back half of the year will come down slightly as content amortization and marketing costs ramp up. But the payoff, investors hope, will come in both viewer engagement and subscriber growth -- particularly in the ad tier, where Netflix sees its next leg of monetization. "[Netflix] is evolving into a larger revenue platform as it recoups monies from paid sharers and leans into advertising tiers as a share gainer," Wells Fargo analyst Steven Cahall said, pointing to the flywheel effect of reinvesting in content and tech to drive more subs, more pricing power, and more margin. Sarandos framed the move not as a cost-cutting stunt but as a creative unlock, saying the company remains "convinced that AI represents an incredible opportunity to help creators make films and series better, not just cheaper." He added, "These are AI-powered creator tools -- real people doing real work with better tools. Our creators are already seeing the benefits in production through previsualization and shot planning work and, certainly, visual effects." The result, Sarandos, marked "the very first GenAI final footage to appear on screen in a Netflix original series or film." And while he emphasized that creators -- and audiences -- were happy with the outcome, the message was clear: AI is starting to shift not just how Netflix markets or recommends content, but how it makes it. Those tools are already expanding into other areas of the business, including AI-assisted ad targeting, voice-based content discovery, and a more adaptive recommendation engine. Sarandos framed it as a way to "expand the possibilities of storytelling," but the financial implications are hard to miss, particularly for a company pledging to double its ad revenue this year and spend $18 billion on content (according to chief financial officer Spencer Neumann). Still, the Street seems to want Netflix's next act to be louder. As Monteiro put it, Netflix's current trajectory feels "overly dependent on further price increases -- at least through 2026 -- to drive revenue." With inflation pressuring consumer spending, a volatile macroeconomic environment, and shifting consumer behavior, Netflix might have only so much pricing leverage left. If the second half of the year can deliver on its content promise -- and push engagement beyond the modest 1% year-over-year growth in viewing hours that Netflix reported -- it could reset the narrative. Shorter-form content, live events, and new ad formats may help shift the platform from being just TV 2.0 to a broader digital ecosystem. For now, Netflix is executing well. But to justify its premium, its story needs to enter the next chapter.

Can adtech and AI help Netflix to chill in an increasingly over-subscribed streaming market? Stranger things have happened...

Back in April, Netflix began to roll out its Ad Suite, a proprietary first-party adtech platform intended to create a fresh revenue differentiator in an increasingly over-subscribed and competitive subscription media market. Flash forward three months and the roll out is now complete in all of Netflix's ad markets and the first results are coming in. According to the firm, things are going well and it maintains an earlier prognostication that it will double its ad revenue this year. Co-CEO Greg Peters says of this foray into martech: It's nearly complete...We're fully on our own stack around the world at this point. That rollout was generally smooth across all countries. We see good performance metrics across all countries and the early results are in line with our expectations. Now we're in this phase of learning and improving quickly based on the fact that being live everywhere means that you get a bunch of feedback about what we can do better, which is great. And what are advertisers excited about? Peters says: Growing scale is something we definitely hear. Also, a highly attentive and engaged audience. So, a bigger audience, but also an audience that's more engaged relative to our peers. The rollout of our own ad tech stack, which helps deliver a bunch of features and then our slate, which is generally amazing and includes a growing number of live events that advertisers are excited about. He adds: The most immediate benefit from this rollout is just making it easier for advertisers to buy on Netflix. We hear that benefit, that ease from direct feedback talking to advertisers. They tell us that it's easier. We see it in our overall sales performance. We've seen an increased programmatic buying. So all of these are consistent with what we are expecting both qualitatively and from a metrics perspective. While the initial rollout is complete, there are plans for further developments, he adds: We're going to roll out additional demand sources like Yahoo!, that will further open up the market for us. Long term, being on our own stack that improves the speed of our execution to deliver this pretty significant road map of features that we have in front of us. It's things like improved targeting and measurement. There's also leveraging advertiser and third-party data sources, which we definitely hear demand for as well. And it will ultimately allow us to improve the ad experience for our members, which is critically important. So that means better adds personalization. So the ads that I see are increasingly different from the ads that say, Ted would see, and they're more relevant for each of us, which is good for us as users and it's good for the brands. We're also going to be introducing interactivity in the second half of the year. So that's exciting. So that's all to say this is a pretty significant milestone for us, one we're super excited to get behind us because now we can shift into the steady release cycle where we're dropping new features all the time, both for advertisers and for members. And that's the development and release model that we have in other parts of the business. Away from the adtech push, another Netflix tech focus is inevitably around generative AI and how it will impact on the firm's operating model, not least its role in content creation. Co-CEO Ted Sarandos pitches: We remain convinced that AI represents an incredible opportunity to help creators make films and series better, not just cheaper. There are AI-powered creator tools - this is real people doing real work with better tools. Our creators are already seeing the benefits in production through pre-visualization and shot planning work and certainly, visual effects. It used to be that only big budget projects would have access to advanced visual effects like de-aging. He points to an Argentinian production, El Eternaut, as a case in point: In that production, we leveraged virtual production and AI-powered VFX. And there was a shot in the show that the creators wanted to show building collapsing of Buenos Aires. So our Eyeline team partnered with their creative team. Using AI powered tools, they were able to achieve an amazing result with remarkable speed and in fact, that VFX sequence was completed 10x faster than it could have been completed with visual -- traditional VFX tools and workflows. And also, the cost of it just wouldn't have been feasible for a show on that budget. So that sequence actually is the very first gen AI final footage to appear on screen in a Netflix original series or film. So the creators were thrilled with the result. We were thrilled with the result. And more importantly, the audience was thrilled with the result. So I think these tools are helping creators expand the possibilities of storytelling on screen, and that is endlessly exciting. Aside from the creative side, there are more operational areas in which gen AI will come into play, adds Peters: The member experience is a place where we feel like there's tons of opportunity to leverage these new generative technologies to improve the experience. We've been in the personalization and recommendation business for two decades, but yet we see a tremendous room and opportunity to make it even better by leveraging some of the more newer generative techniques. We're also rolling out, have piloted right now, a conversational experience that allows our members to basically have a sort of natural language discussion with our user interface thing - 'I want to watch a film from the '80s that's a dark psychological thriller'. [You] get some results back, maybe iterate through those in a way that you just couldn't have done in our previous experiences. So that's super-exciting and we see that all of the work that we do there essentially is a force multiplier to that large content investment that we're making. If we do a better job there, that means every dollar that we spend means more value back to our members by connecting them with the titles that they're truly going to love. And then the circle is squared by looping back to advertising as Peters argues: It's a high hurdle to create a brand forward spot in a creative universe of one of the titles that we're currently carrying, but it's very compelling for both watchers and for those brands. We think these generative techniques can decrease that hurdle iteratively over time and enable us to do that in more and more spots. So there's a bunch of places where we think we've got an advantage in terms of data and scale where we can leverage these new generative techniques to deliver just more benefits for our members and for our creative community. Early days on both fronts, adtech and AI, but Netflix needs to get its house in order quickly as competition from the likes of Disney+, Amazon and Apple hots up. Netflix has a powerful position in the sector - its brand name is a verb as we continue to 'Netflix and chill'. But the harsh reality is that fewer of us are defaulting to that option quite as automatically as we did a couple of years ago.

Netflix to Roll Out Interactive Ads Later This Year | PYMNTS.com

By completing this form, you agree to receive marketing communications from PYMNTS and to the sharing of your information with our sponsor, if applicable, in accordance with our Privacy Policy and Terms and Conditions. "We've closed the large majority of deals with the major agencies, those results have generally been in line or slightly better than our targets, and consistent with our goal to roughly double the ads business this year," said Netflix co-CEO Greg Peters, in a conference call to discuss earnings. Executives said the ad business is ahead of internal forecasts and gaining momentum globally. Peters said Netflix did well in the upfronts, a period in which media companies sell ad inventory for the upcoming TV year. Peters said advertisers are responding positively to Netflix's growing global scale, high engagement rates, and the new Netflix Ad Suite launched in April. "The most immediate benefit from this rollout is just making it easier for advertisers to buy on Netflix," Peters said. "We've seen an increase in programmatic buying. ... We're going to roll out additional demand sources like Yahoo that'll further open up the market." The company also plans to introduce more advanced ad features such as improved targeting, measurement tools, and personalized ad experiences. "We're also going to be introducing interactivity in the second half of the year," Peters said. Netflix plans to ramp up its gaming business as well, but at a pace appropriate to demand. Peters pointed out that gaming represents a "very, very large" total addressable market, or TAM. Read more: Trump's Movie Tariff Plan Causes Tremors in Tinseltown In the quarter, Netflix rolled out a new website user interface. Peters said the previous look harkened back to the Netflix of 10 years ago and the new look is more able to incorporate advanced capabilities. One of those is a conversational artificial intelligence (AI) chatbot being piloted at Netflix. The viewer will be able to talk in natural language with an AI to do things like find shows to watch according to specific preferences and genre. Ted Sarandos, Netflix co-CEO, said the company has a "strong" lineup for the second half, with new seasons of "Stranger Things" and "Wednesday" as well as new movies like "Happy Gilmore 2" and a new "Knives Out" film. A movie from Ben Affleck and Matt Damon is also coming. The company is also expanding its live programming strategy, with events such as an NFL Christmas Day doubleheader, WWE matches, and boxing. "Live has outsized positive impacts around conversation, around acquisition, and we suspect, around retention," Sarandos added. Netflix's strategy is not just to deliver one-time hits, but provide a steady stream of content that will be well-received by viewers, Sarandos added. The company believes in its local-for-local philosophy, where it invests in shows created by local creators for the local audience. Case in point is its partnership with French broadcaster TF1. "The fundamental purpose for this TF1 partnership is all about that goal of expanding our entertainment offering. How do we enhance the value we deliver to members?" Peters said. "In this case, it's specifically about highly relevant local-for-local content in a country that has strong demand for that local content." BofA Global Research analyst Jessica Reif Ehrlich said Netflix is "well positioned given the company's unmatched scale in streaming, further runway for subscriber growth, significant opportunities in advertising and sports/live" events as well as continued earnings and free cash flow growth, in her July 15 report shared with PYMNTS. Ehrlich noted that South Korea's "Squid Game" Season 3 had the best 10-day viewership ever for a Netflix show, with 106.3 million views. Overall, in the Nielsen multiplatform ratings for the 2024-2025 TV season, Netflix claims 10 of the top 15 shows by total viewing. The analyst said the second half of 2025 should "build on this success" with the return of hit shows, new movies and live sporting events. Netflix is also thinking of getting into video podcasting, Ehrlich said. Read more: Streaming Overtakes Broadcast and Cable Watchers for First Time Asked if Netflix would be open to acquiring other studios or networks, CFO Spencer Neumann said the company has historically been builders, not buyers. The company does "look at a lot of things," he added, but currently has "no interest" in owning legacy media networks. In the second quarter, Netflix reported a net income of $3.1 billion ($7.19 per share) compared with $2.15 billion ($4.88 per share) in the like quarter a year ago. Revenue rose 16% to $11.08 billion year over year. It posted free cash flow of $2.27 billion. Netflix's financial performance exceeded Ehrlich's expected earnings per share (EPS) of $7.05 per share as well as projected revenue of $11.04 billion and operating income of $3.68 billion. The Street's consensus EPS is $7.07. Netflix said the second quarter's revenue increase was due to signing up more subscribers, higher prices and increased ad revenue. Every geographic region saw double-digit revenue growth. Looking ahead, Netflix raised its projected 2025 revenue to $44.8 billion to $45.2 billion from $43.5 billion to $44.5 billion. The higher forecast would reflect the dollar's weakening, subscriber growth and ad sales. It expects earnings of $6.87 per share for the year. Shares of Netflix fell less than 1% to $1,263.25 in after-hours trading. Separately, Netflix also announced on Thursday (July 17) that the first two locations of Netflix House, its food, shopping and entertainment complex based on its streaming hits, will open in late 2025 at the King of Prussia Mall in the Philadelphia area and the Galleria Dallas in Dallas. A third location is slated to open in Las Vegas in 2027. Each complex is more than 100,000 square feet and will feature virtual reality, gaming and other experiences as well as dining, all based on Netflix's hit shows such as "Squid Game," "Stranger Things," "Bridgerton," "Money Heist," "One Piece," among others. For example, fans can play the terrifying "Red Light, Green Light" game from "Squid Game." Dining is provided by Netflix Bites, where the food also takes its cue from its shows and movies.