Netflix's Squidward Season 3's poor reception leads to stock price drop?

Netflix (NASDAQ ticker NFLX) delivered an impressive Q2 financial report, with revenue and profits both exceeding market expectations, and the company raised its full-year forecast. However, the market's already high expectations led to a stock price drop of over 4% after the report. Netflix's second-quarter revenue reached $11.08 billion, a 17.3% year-on-year increase, slightly higher than the company's estimated $11.04 billion. Earnings per share (EPS) were $7.19, higher than the expected $7.03 and far above the $4.88 in the same period last year.

Netflix Q2 Financial Report Looks Bright, P/E Ratio Around 40 Times

Netflix raised its full-year revenue forecast for 2025 to $44.8 billion to $45.2 billion, higher than the original estimate of $43.5 billion to $44.5 billion. Netflix stated that this revision primarily reflects the weakening US dollar, subscriber growth, and continued growth in advertising business.

Despite strong performance, investors did not show enthusiasm. William Blair analyst Ralph Schackart noted that Netflix's performance was good but difficult to exceed the market's already high expectations. The company's stock has risen over 42% this year, with a P/E ratio of around 40 times, far above market levels. The reason why Netflix's stock price declined despite the good financial report might be due to the poor reception of Squid Game's third season. The following is an analytical report, purely market observation, and not any investment advice.

Squid Game Season 3 Poor Reception Impacting Stock Price?

In terms of content, Squid Game's third season was officially launched, creating over 150 million viewing hours in its first week, again topping Netflix's global non-English series list. However, despite the impressive viewing numbers, audience reception did not meet the standards of the first two seasons and could be described as heavily criticized.

According to multiple review platforms, Squid Game's third season was criticized for lack of narrative innovation and character development. Many viewers found the pacing slow, repetitive, and lacking surprise. Some critics viewed the season as merely replicating a successful formula rather than breaking new ground, with numerous criticisms on social media. Viewers extensively criticized the plot for having too many lengthy subplots and contrived storylines. The plot twist of "a baby becoming the winner" was particularly strongly questioned, with some comments calling it "childish and illogical". However, despite mixed reviews, the show effectively drove platform user engagement and stickiness. Co-CEO Greg Peters stated that overall user stickiness remains good, with retention rates still leading the industry.

Advertising Business Driving Revenue Growth

Netflix continues to develop its ad-supported plan, with users of the $7.99 monthly ad-supported package now exceeding 94 million, a significant growth from 70 million in November last year. The company expects advertising revenue to reach $3 billion in 2025.

Additionally, Netflix's content for the second half of the year will be quite rich, including new seasons of "Wednesday" and "Stranger Things", while also expanding live sports and entertainment content, such as NFL Christmas games, WWE Raw, and potentially UFC events, further enhancing platform advantages.

Netflix expects content and marketing expenses in the third and fourth quarters to increase significantly, but remains optimistic that profits will grow year-on-year, potentially reaching 30%, higher than the original expectation of 29%. Nevertheless, the market remains focused on whether the company can maintain profitability under rising costs and continue to drive user growth and revenue expansion.