Financial Report Preview | Netflix (NFLX.US) Q2 results will soon be announced, and user engagement and advertising business will become the focus of the market

The Zhitong Finance App learned that streaming giant Netflix (NFLX.US) will announce the results for the second quarter of 2026 after the US stock market on Thursday. Wall Street currently generally expects Netflix's second-quarter revenue to increase 13.5% year-on-year to US$12.58 billion, and earnings per share will reach 0.79 US dollars. In addition to financial metrics, investors will focus on the growth in user engagement and advertising business revenue.

User engagement is the focus of attention

Netflix currently no longer discloses the number of subscribers, and this indicator has been regarded by the market as a key indicator for measuring the company's operating performance in the past — so investors will look for other indicators to measure the company's operating conditions in the second quarter earnings report. As one of the world's leading streaming platforms, user engagement is at the core of Netflix's business model. The company's ability to raise subscription prices and expand ad revenue all depends on whether the platform can continue to occupy a large amount of users' viewing time.

However, as investors increasingly worry about whether Netflix's competitive advantage will continue in the increasingly competitive media industry, the stock price has fallen by more than 21% since this year, down about 45% from the all-time high set about a year ago.

Today, competition for users' screen time has come from all corners of the media industry, putting Netflix's core business of on-demand movies and TV shows under unprecedented pressure. Competitors include not only other high-end streaming platforms, but also Twitch livestreams, long-time user attention podcasts, TikTok short videos, and creator gaming platforms such as Roblox (RBLX.US). This environment makes it harder to keep the audience's attention. In this context, how Netflix management responds to recent media reports about Netflix's internal concerns about declining user engagement is likely to be the focus of market attention.

The advertising business is growing or under pressure

Although Netflix is currently still profitable, if user engagement continues to decline, the company's ability to drive cyclical price increases over the next few years will be affected. At the same time, this may also limit the development space for ad subscription packages.

Netflix expects advertising revenue to double to about $3 billion this year — a target that was confirmed in a letter to shareholders in the first quarter and an advertising investment conference held in May of this year, but this still accounts for only about 6% of total revenue. If the advertising business is to become a more important source of growth in the future, it must be based on a large and active user base. However, according to Nielsen Gauge data, in April of this year, YouTube accounted for 13.4% of the total time spent watching TV in the US, while Netflix dropped from 8.8% in January to 7.9% in April.

This also explains a series of recent moves by Netflix that have puzzled the industry. In recent weeks, the company signed with the Stokes Brothers, a YouTube influencer with 160 million subscribers, to introduce “Hot Ones” hosted by food creators Meredith Hayden and Sean Evans, and reached partnerships with publishers such as Condé Nast (Condé Nast), Hearst, and People Inc., to launch a large number of low-cost short video content originally posted mainly on YouTube.

The market generally believes that Netflix is in an “identity crisis” and abandons its high-end streaming brand position in order to catch up with YouTube. But this view ignores the real reason. Netflix is not chasing YouTube viewers, but YouTube ad load (ad load).

Netflix said that at present, the number of active monthly viewers of commercials worldwide has exceeded 250 million, up from 190 million a few months ago. However, this number represents the number of viewers who watch at least one minute of ad content each month and the company's estimated number of household viewers rather than the number of subscribers. Netflix must prove that these reach numbers actually translate into ad impressions that advertisers are willing to pay a high price to buy.

Ad revenue follows a simple logic: revenue comes from ad impressions, ad impressions come from watch time, and watch time depends on users continuing to watch content.

However, at present, Netflix's viewing performance for popular series has weakened. According to Netflix's own data, viewership for the first four weeks of “Running Point” and “The Four Seasons” dropped by more than 50% compared to the first season; the second season of “Beef” (Beef) dropped more than 70%. Furthermore, the new series originally planned by the “Stranger Stories” production team has recently been cancelled.

At the same time, the cost of content continues to rise. Netflix expects content amortization costs to increase by about 10% in 2026, mainly in the first half of the year. In other words, at a time when the advertising business needs more time to watch, companies are bearing higher content costs.

Thus, creator content, podcasts, and short videos for magazine brands provide a solution. This content is low in cost, high in volume, and every additional hour of viewing time means an additional hour of inventory to run ads. So it's not just a show strategy; it's also creating ad inventory.

More low-cost video content also means that it will be more feasible to launch a free version of the service in the future. Pluto TV has proven that the free to pay model can help Paramount+ attract users. According to Anna statistics, in the past nine quarters, advertising packages contributed 78% of new users to platforms providing ad subscription services.

Whether or not it actually launches a free version in the future, Netflix is building up a larger and larger ad inventory. According to Anna data, Netflix's user churn rate dropped back to about 2% in May 2025, and there was a brief increase after the previous price increase. Overall, users are still showing a high level of loyalty. Reducing reliance on expensive original content also helps Netflix free up money to invest in international content and sporting events — these are important directions for Netflix to attract users in recent years.

But it also comes at a cost. Netflix has always been known as the “market opener in the streaming industry,” and is known for its curated, high-quality, and large-scale content. Now, the continuous addition of creators' short videos and magazine content has gradually brought the platform closer to Walmart.

Additionally, Netflix is the only major streaming platform that doesn't have a parent company to support the transformation. Amazon (AMZN.US) owns e-commerce business, Apple (AAPL.US) owns hardware business, YouTube is backed by Google (GOOGL.US), and Netflix only has subscription revenue and advertising business.

Therefore, the financial report released this Thursday and the “User Engagement Report” released later will determine whether this “ad inventory strategy” actually creates the viewing time required for the advertising business. The question of brand positioning can be discussed later, but the mathematical logic of the business model won't wait.

Wall Street is still generally bullish

Despite market concerns about user engagement trends and global subscriber growth, Wall Street analysts generally maintain a bullish stance on Netflix and generally give it a “buy” rating, but many institutions have lowered their target prices.

Morgan Stanley maintained Netflix's “gain” rating while lowering the target price from $115 to $90. Morgan Stanley analyst Sean Diffley said, “We believe that market concerns about user engagement have been greatly exaggerated, and we believe the content lineup for live streaming events and sporting events is expected to improve in the second half of the year.”

Guggenheim said in the research report that since the number of members grew faster than the viewing time in the first quarter, it is expected that the average daily viewing time per member will still be under pressure. Analyst Michael Morris pointed out that the business environment in the second half of 2026 will clearly be more severe than recent trends, and he expects management to directly acknowledge this during the earnings call.

He said, “In the second half of 2025, the fifth season of “Stranger Things” (with over 59 million views in the first week), the third season of “Squid Game”, and the second season of “Wednesday” were concentrated online, bringing a peak of viewing. However, although the second half of 2026 has content such as the fifth season of “Outer Banks”, the second season of “The Gentlemen”, “Miss Holmes 3” (Enola Holmes 3), more NFL events, and MLB's “Field of Dreams” (Field of Dreams), no single work can achieve the influence of “Stranger Things.” However, he maintained a “buy” rating for Netflix and gave him a target price of $120.