Earnings season is just about ready to ramp up. As usual, Netflix (NFLX 2.00%) and PayPal (PYPL 1.71%) are some of the first hot stocks for investors to watch. The two companies are scheduled to report their third-quarter results next week.
Though both stocks pulled back over the past three months (Netflix declined about 13% and PayPal fell 7%), investors shouldn't underestimate the pressure on these companies. Zoom out just 12 months and both of these stocks have been huge winners. Over the past year, Netflix and PayPal are up about 79% and 21%, respectively.
Both stocks have benefited from strong growth in their underlying businesses. Can Netflix and PayPal keep up their momentum?
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Netflix: What to watch
After whiffing on its subscriber growth in Q2 by reporting net member additions more than 1 million below what management guided for, investors will be watching member growth closely this quarter. Management forecast net member additions of 5 million -- down from the 5.15 million net members the company added in its second quarter.
Investors shouldn't assume management adopted a more conservative model when forecasting third-quarter net member additions. As management reminded investors in its second-quarter shareholder letter, the company strives for accuracy with its forecast. Occasional misses, therefore, are likely.
Investors will also want to look to see how Netflix's contribution margin -- a measure of segment revenue less cost of revenues and marketing expenses incurred by a given segment -- is faring for both Netflix's U.S. and international streaming businesses. The profitability metric has been a bright spot for Netflix recently, coming in at 39.1% and 15.5% in the U.S. and abroad, respectively, in Q2. These metrics are up from 37.2% and negative 1.1% in the year-ago quarter, respectively. For Q3, management guided for a U.S. contribution margin of 37.8% and an international contribution margin of 14.7%.
PayPal: What to watch
Financial technology company PayPal has impressed investors recently with its strong growth. The company's solid execution is particularly evident in PayPal's second quarter, when revenue and EPS surged 23% and 29%, respectively. This growth was helped by a 29% year-over-year increase in payment volume and a thriving person-to-person (P2P) app (Venmo), among other catalysts.
Many investors will likely be watching PayPal's revenue growth closely when the company reports its third-quarter results. Though PayPal's second-quarter revenue came in above a consensus analyst estimate for the quarter, the company's revenue guidance for its third quarter fell short of expectations. Management said it expected third-quarter revenue between $3.62 and $3.67 billion, representing 12% to 13% year-over-year growth -- a significant deceleration compared with PayPal's second-quarter growth rate.
Netflix reports its third-quarter financial results on Tuesday, Oct. 16, and PayPal will release its quarterly update on Thursday, Oct. 18.
