Netflix shares are falling. But the big challenge is making sure people keep watching. (Video)

Netflix (NFLX) shares are up an impressive 50% year to date, and the stock is currently trading near the high end of its 52-week range.

But don’t start screaming just yet: the company’s next big challenge is maintaining high — and consistent — viewership levels.

Netflix recently released the latest edition of its semi-annual viewership report, in which the streaming giant revealed that from January to June, subscribers watched over 94 billion hours on the platform.

Perhaps even more importantly, it was the first report that allowed investors to track annual trends in Netflix’s global engagement. This comes after the streamer added more than 39 million subscribers in the 12 months ending in June.

Most of the subscriber gains were due to Netflix’s continued implementation of a solution to limit password sharing, as well as the introduction of a cheaper ad-supported tier. However, the company itself says that engagement, or the number of hours spent watching Netflix, is a more important metric than the actual number of subscribers, especially as more competitors enter the market.

Problem? Analyzing aggregate reports, engagement on the platform has been virtually flat year over year. It is not clear why. However, if this trend continues, it could have lasting consequences for the streamer’s future.

“This lack of growth could concern Netflix for a number of reasons,” MoffettNathanson analyst Robert Fishman wrote while reviewing the data last week. “For starters, if the lack of engagement growth is due to a lack of real user growth, it means that the subscriber growth we are seeing is simply due to better monetization of the existing base – in other words, an actual price increase.”

According to the numbers, the platform’s total engagement rose to 94 billion hours from January to June, which is just a 1% increase from the 93.5 billion hours watched during the same period last year. This is despite over 39 million subscriber growth over the past year.

Meanwhile, average daily viewing hours per subscriber on the platform declined, falling 13% year-over-year to 1.9 hours in 2024, compared to the previous 2.1 hours in the year-ago period.

For its part, Netflix isn’t as concerned. A company spokesperson told Yahoo Finance that engagement is good, even given recent difficulties with attacks on people sharing passwords. The company also mentioned its continued dominance in total TV viewership, according to the Nielsen Gauge report.

However, according to Fishman, the lack of significant growth could indicate insufficient pricing power, which is the company’s ability to raise streaming prices without reducing demand. Analysts speculate that Netflix may prepare another round of price increases later this year.

Price ceiling?

Pricing power has become especially important for streaming companies as consumers become more selective. American consumers subscribe to four streaming services and spend an average of about $61 a month, according to Deloitte’s latest Digital Media Trends report. This means you’re less likely to retain loyal subscribers over time.

What’s more, according to the latest data from measurement platform Antenna, subscriber churn – the fact that users pay to cancel streaming plans – increased in August compared to the year-ago period.

Across all streaming platforms, the churn rate in August was 5.2%, up from 4.7% in the same month last year, as more platforms implemented measures to limit password sharing and raised their prices. Netflix saw churn rise to 2%, up from 1.8% in August 2023 but down from 2.8% in July after the company phased out its entry-level tier.

Good news? Netflix still has the lowest churn rate of all major streaming players. However, “we probably have a bigger price cap ahead of us than we had 12 or 18 months ago,” CFRA analyst Ken Leon told Yahoo Finance.

Netflix’s “Basic” plan was offered to U.S. consumers for $11.99 per month. The plan’s removal comes after Netflix touted the success of its less than two-year-old ad-supported offering, which costs $6.99 a month. For ad-free viewing, Netflix offers plans starting at $15.49 per month.

However, if engagement levels cannot be maintained, the lack of growth can translate into a fledgling advertising business and reduce overall revenues.

“Engagement levels have a direct impact on the revenue generated by Netflix’s increasing advertising levels,” Fishman said. “Stopping engagement growth may now also mean stopping inventory growth (per subscriber).”

Delivering strong revenue growth has become a priority for the company, especially as expectations remain high. Wall Street analysts expect Netflix to post nearly 15% revenue growth when it reports third-quarter earnings on Oct. 17. According to Bloomberg’s latest estimates, profits are expected to increase by about 40% year over year.

Netflix’s full-year earnings are projected to increase about 60% year-over-year to $19.08 per share, while full-year revenue of $38.73 billion would represent growth of about 15% year-over-year.

“The stock valuation points to a growth stock,” CFRA’s Leon told Yahoo Finance. “So if you suddenly get to 8-10% growth rather than 15%, that will be a problem and the stock will fall.”

“It’s the law of large numbers,” he added. “The fact that Netflix can just report really high revenues really matters.”

Alexandra is a senior reporter at Yahoo Finance. Follow her on X @alliecanal8193 and email her at [email protected]

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