Netflix Earnings: What to Watch

Netflix (NASDAQ: NFLX) epitomizes the types of stay-at-home businesses that have benefited from people sheltering during the coronavirus pandemic. Consumers have turned to services like Netflix as they spend more time in front of the TV. Subscriptions to the company's platform surged in both Q1 and Q2. With so much momentum in Netflix's business, it's not surprising that the growth stock has soared recently. Shares are up 67% year to date.

Despite the stock's huge gains, expectations for the streaming-TV company's third quarter aren't very high. With so many people starting Netflix subscriptions during the first half of the year, management indicated in the company's second-quarter shareholder letter that it believed growth could slow significantly in Q3 due to a pull-forward of demand into the first half of the year.

Here's a closer look at what to expect from subscriber growth in Q3, as well as a preview of three key areas investors will want to check on when Netflix reports earnings today.

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1. Subscriber growth

It would be difficult to overstate the acceleration Netflix saw in subscriber growth as consumers sheltered at home during the first half of the year. In the first and second quarter of 2020, Netflix added about 16 million and 10 million subscribers, respectively. This compares with a total 12.3 million subscriber additions in the first half of 2019.

But going into Q3, management was concerned that the period could see a sharp drop-off in subscriber growth since many new subscribers may have been pulled forward into the first half of the year as they turned to streaming-TV during peak stay-at-home orders.

Management guided for 2.5 million new members in Q3.

2. Operating margin

Another key data point investors should check on is Netflix's operating margin. The key profitability metric has been expanding rapidly over the years, demonstrating the operating leverage of its business model. It's crucial that the company continues to demonstrate its operating leverage since it is still (in most quarters) burning through cash; an expanding operating margin as revenue grows, therefore, keeps investors believing that the company can eventually become profitable enough to consistently fund its growth with its own cash flows.

For the full year, Netflix was guiding for an operating margin of 16%. Look for management to reiterate this important target.

3. Earnings per share

While Netflix isn't consistently profitable on a free-cash-flow basis yet, it is profitable on its income statement. Indeed, Netflix's earnings per share have been growing rapidly as the company benefits from operating leverage.

Management guided for third-quarter earnings per share of $2.09, up from $1.47 in the year-ago quarter.

Netflix reports results for its third quarter after market close today. It will also host a live conference call, available on its investor relations website, to discuss the quarter at 6 p.m. EDT.

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Daniel Sparks has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Netflix. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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