Netflix (NFLX 5.03%) will post its third-quarter results after the market closes on Monday, Oct. 16. The stock is up sharply this year, which means investors expect the streaming giant to show impressive growth for the quarter that just closed while also projecting strong momentum for the fourth quarter.
Here are the key trends that investors will be watching in the earnings report.
Netflix has seen subscriber additions increase dramatically over the past six months, notching 10.2 million new users in the first half of 2017, 21% more than the additions in the first half of 2016. Wall Street loves accelerating growth, especially if it's also outpacing management's guidance. That fact helps explain why the stock is doing so well this year.
Executives said back in July that they took into account their latest subscriber-estimate misses in the current forecast, and they're being more aggressive this time around. Netflix has predicted faster gains both in the U.S. and international segments for the third quarter, with overall membership rising by 4.4 million compared to 3.57 million in the year-ago period. Netflix expects the third quarter to have brought total membership to 108 million.
The forecast for the fourth quarter will be even more closely watched by Wall Street. After all, it's typically one of the streaming video giant's best seasons thanks to the flood of new smartphone, tablet, and smart TV devices that hit the market.
It will be hard to top last year's result, though, given that the company added 7 million members in that period to trounce management's guidance by almost 2 million. Netflix will be counting on its exclusive content to lift subscriber rolls this time around and should be heavily promoting a few marquee launches, including the second season of the hit show Stranger Things.
Assuming Netflix comes in close to its third-quarter guidance, then the company will only need to add about 4.5 million users in the fourth quarter to notch its fourth consecutive year of accelerating global subscriber gains.
Netflix's recent price increase could make growth a bit harder to achieve, but it isn't likely to hurt much. After all, Netflix's surging expansion pace over the past six quarters came while management was rolling out a price bump on its existing membership base. Still, it will be interesting to see how executives aim to balance price increases against their aggressive long-term subscriber growth targets that call for as many as 90 million paying streamers in the U.S. and many more located in international markets.
The price increase is happening too late in the year to have a big impact on 2017 profitability, and so operating margin should stay around the same rate that management forecast at the beginning of the year. But I wouldn't be surprised to see Netflix update its longer-term profit forecast in light of the new pricing.
CEO Reed Hastings has said the team plans, over the coming years, to steadily increase operating margin from the 7% rate the company should reach for the full 2017 year. Due to the healthy operating trends, double-digit profit margins seemed likely even before Netflix hiked its prices this latest time. Now, that profit level could come quicker to mark a sharp improvement over the 4% rate the company achieved in 2016.