By Jake Conley

Netflix (NFLX) stock fell over 9% in premarket trading after the company's third quarter outlook fell short of expectations and engagement trends failed to inspire confidence on the Street.

The streaming giant reported earnings that beat estimates and revenue that was roughly in line with forecasts in Q2. Revenue grew 13.4% year over year to $12.56 billion, slightly underperforming Bloomberg consensus estimates of $12.58 billion. Revenue growth also moderated from 16.2% in the first quarter of this year.

Earnings per share came in at $0.80, slightly beating analyst expectations of $0.79 and coming in above the $0.73 reported a year ago.

Netflix shares are down 40% over the past 12 months, and the company acknowledged that "the entertainment industry remains dynamic and competitive."

"We aim to stay ahead by executing against our three areas of focus: delivering more entertainment value, leveraging technology to improve every aspect of our service, and improving monetization," management stated.

Netflix seeks next catalyst

Netflix will be looking for its upcoming short-form content model to help bring in more viewers and keep them on the platform longer, adopting a strategy battle-tested by major social media platforms. Beginning on Aug. 3, Netflix will be running short-form content from publishers such as Buzzfeed Studios, Condé Nast, Hearst, and Penske Media.

The streaming giant has faced consistent questions over whether it would begin offering a free tier. While such a free offering could make sense in some markets and is something "we're going to continue to consider," co-CEO Greg Peters said, "we have no near-term plans to launch something."

"I believe that we are delivering one of the best entertainment values that has ever existed," Peters added, specifically citing Netflix's $8.99-per-month US tier.

Netflix has also faced questions over viewership drop-offs between first and second seasons. Co-CEO Ted Sarandos said Thursday that while they often see drop-off, the company attributes those shifts to the efforts Netflix puts into promoting first seasons of new shows.

Fans are seen at the Bullpen Fan Activation during the MLB Opening Night Game: Yankees vs. Giants, at Momo's on March 25, 2026, in San Francisco. (Thos Robinson/Getty Images for Netflix). Thos Robinson via Getty Images

In its ad business, Netflix remains on track to deliver $3 billion in ad revenue for 2026, the company said Thursday, as the streaming giant has doubled down on its cheaper tier offering. The company noted "strong interest" from advertisers in its live events slate, including the Women's World Cup, football and baseball programming, and wrestling matches.

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The streaming giant believes it has penetrated fewer than 45% of total addressable households and is capturing only 5% of TV viewing share globally, and that those figures give Netflix significant room to grow, CFO Spencer Neumann said to analysts on Thursday.

On a down note for the company, both net cash from operating activities and free cash flow fell year on year, with free cash flow declining to $1.5 billion from $2.3 billion. Accounting for a chunk of the drop in cash flow were "higher cash tax payments due in part" to the $2.8 billion breakup fee Paramount Skydance paid to Netflix after Paramount won the bid for Warner Bros. Discovery.

The decision to back out of the bidding war for the film studio and cede the purchase to David Ellison's Paramount Skydance (PSKY) continues to hang over Netflix's head.

Netflix also touted its use of generative AI throughout the streamer's creative work. "GenAI workflows" have been used in roughly 300 of Netflix's titles so far in 2026, per the release, primarily concentrated in postproduction work.

The tools have been used to produce hard-to-make scenes featuring large crowds, battle sequences, and "worldbuilding establishing shots," the company said, noting that without generative AI, those scenes might not have been included.

"We believe it takes great artists to make something great, and AI is not changing that," Sarandos said. "AI will give creators better tools to bring their visions to life."

Jake Conley is a breaking news reporter covering US equities for Yahoo Finance. Follow him on X at @byjakeconley or email him at jake.conley@yahooinc.com.

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