Ranking among the streaming giant’s most-discussed business initiatives, Netflix (NASDAQ:NFLX) anticipated a new era of opportunities when it announced its advertisement-supported subscription tier. Unfortunately, the early results indicate that the enterprise has a wall to climb. Not surprisingly, then, the market punished NFLX stock, which fell nearly double digits in the afternoon session. Moreover, Netflix’s poor performance implies a worse-than-expected consumer economy.
According to Digiday, Netflix fell short of “ad-supported viewership guarantees made to advertisers.” In response, the streaming service allowed the affected companies to take their money back for ads not run. While specific shortfall amounts vary by advertiser, five agency executives familiar with the matter reported that in some cases, Netflix roughly delivered only 80% of the expected audience.
“They can’t deliver. They don’t have enough inventory to deliver. So they’re literally giving the money back,” stated one of the execs. Netflix declined to comment, but if some substance exists to the report, it bodes poorly for NFLX stock.
Indeed, the higher ups at Netflix looked forward to the release of the ad-tier plan to reinvigorate NFLX stock. In an interview for the New York Times’ DealBook Summit, Netflix co-founder and co-chief executive Reed Hastings regretted not bringing the ad tier sooner.
“That’s the real thing that I missed,” Hastings said. “We didn’t have to steal away the advertising revenue, in fact, it was pouring into connected TV if the inventory is there.”
Unfortunately, that assessment appears to have missed the mark.
NFLX Stock Presents a Potentially Worrying Economic Barometer
After suffering severe losses in the first half of this year, many investors looked forward to NFLX stock rebounding. Indeed, in the trailing half-year period inclusive of today’s ugly downfall, shares gained roughly 60%. Still, the Thursday session risks serving as a harsh reality check.
In October, NFLX stock surged by double digits as the underlying company beat expectations for its third quarter. As InvestorPlace’s William White mentioned, not only did Netflix beat top- and bottom-line estimates, it also saw a return to subscriber growth. Even better for the industry, rival Disney (NYSE:DIS) bounced higher both in sympathy and for underlying consumer economic catalysts.
Essentially, with inflation beating down household budgets, Americans started to pull back on traveling and dining out. However, against a dollar-for-value perspective, streaming delivers compelling entertainment for a low cost, especially compared to exotic vacations. Unfortunately, this thesis for NFLX stock appears to contrast with the reality staring down Netflix. It’s possible consumers are cutting back on cheap discretionary expenditures.
To be fair, the aforementioned advertising executives doesn’t believe the viewership miss represents a long-term obstacle for NFLX stock. Rather, they target how quickly Netflix brought the ad-tier subscription to the public.
Nevertheless, while Netflix shares dropped nearly 9% in the early afternoon session, Disney also suffered a significant market loss. On Thursday, DIS dipped around 4%. For the time being, then, traders appear to be treating this latest report as an industry-wide dilemma.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.