Netflix Earnings: What to Watch – Motley Fool

Netflix Earnings: What to Watch – Motley Fool

Netflix (NASDAQ:NFLX) is one of the first companies to report quarterly results every earnings season, and its fourth-quarter report is already coming up. The important quarter will provide insight into whether or not the company is returning to stronger growth in subscribers after enduring a post-pandemic lull. The company’s subscriber growth in Q3 suggested the rebound is underway — and investors are likely optimistic it will persist in Q4.

Ahead of the streaming-service specialist’s fourth-quarter earnings report on Jan. 20, here’s a preview of some of the important areas investors will be watching.

Image source: Getty Images.

Subscriber growth

First and foremost, investors will want to see strong growth in subscribers in Q4. After Netflix’s second-quarter subscribers grew by only 1.5 million sequentially, this key metric picked up momentum in Q3. Third-quarter subscribers increased 4.4 million sequentially — the company’s biggest uptick in subscribers since the fourth quarter of 2020.

Management blamed slower growth earlier in 2021 on a pull-forward in demand in 2020, when many people were looking for ways to stay entertained while sheltering at home. But it was encouraging to see growth picking back up in the third quarter of 2021.

Netflix impressively guided for fourth-quarter subscribers to increase by 8.5 million sequentially. This would match the 8.5 million new subscribers the company brought in during the fourth quarter of 2020. Netflix noted in the company’s third-quarter earnings call that 8.5 million net subscriber additions would put the company back into a pre-COVID quarterly growth range of approximately 8 million to 8.8 million.

Investors should note that Netflix doesn’t lowball its guidance. On the contrary, the guidance it provides with the public aims for accuracy. This means that it’s common for the company to miss its own guidance — though more often than not, it does meet or exceed it.

Operating margin

Another key metric Netflix investors should check on is the company’s operating margin. An important element in the bull case for Netflix stock is that the profitability metric continues expanding over time, albeit with an allowance for some quarter-to-quarter volatility.

Management guided for its fourth-quarter operating margin to be 6.5%, as content production started picking back up. This is down from 14% in the year-ago quarter.

“The year over year decline in operating margin is due mostly to our backloaded big content release schedule in this Q4, which will result in a roughly 19% year over year increase in content amortization for Q4’21 (compared with approximately 8% growth year to date),” management explained in Netflix’s third-quarter shareholder letter.

For the full year, however, Netflix said it expects its 2021 operating margin to be 20% or better. This is up significantly from the company’s 2020 operating margin of 18%. Investors should look for management to hit its full-year guidance for a 20% operating margin, and guide for further improvement in 2022.

Netflix reports its fourth-quarter results after market close on Thursday, Jan. 20.

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