Netflix delivered a strong first quarter but saw its shares fall nearly 10% after management’s second-quarter guidance and the surprise announcement that co-founder Reed Hastings plans to leave the board in June spooked investors.
Revenue for Q1 reached $12.25 billion, up 16.2% year-on-year and ahead of the $12.17 billion consensus, while earnings per share came in at $1.23 against expectations of $0.66.
The problem came from what Netflix said would happen next, with Q2 revenue guidance of $12.57 billion falling short of the $12.64 billion figure analysts had expected.
Q2 EPS guidance of $0.78 per share trailed the $0.84 that had been pencilled in, while operating income guidance of $4.11 billion came in well below the $4.34 billion forecast.
Netflix attributed the Q2 margin compression to content spending weighted toward the first half of the year, with content amortisation expected to peak on a year-over-year basis in Q2 before easing in the second half.
The full-year revenue guidance of $50.7 to $51.7 billion was maintained rather than raised, disappointing investors who had expected Netflix’s recent US price increases and the collapsed Warner Bros. Discovery acquisition to free up additional headroom.
Hastings’ announcement that he would not seek re-election as chairman added a leadership uncertainty dimension that the market did not welcome at an already anxious moment.
Morgan Stanley maintained its Overweight rating and $115 target, arguing the guidance miss is a timing issue given US price hikes typically take two to three months to flow through revenue.
The advertising business remains a genuine growth engine, with the ad-supported tier accounting for over 60% of new sign-ups across the 12 markets where it operates and ad revenue on track to roughly double to $3 billion in 2026.
Operating margins have expanded from 17.8% in 2022 to 32.3% in Q1 2026, a trajectory that the bulls argue more than justifies patience through what they see as temporary guidance noise.
