Netflix (NASDAQ:NFLX) will be put to the test next month when it reports its fourth-quarter results. Typically one of the first FAANG stocks (a group of popular stocks made up of Facebook, Amazon.com, Apple, Netflix, and Alphabet, Google's parent) to report its fourth-quarter results, Netflix will get a shot at setting a positive tone for earnings season.
Of course, investors have high expectations for the streaming TV company, particularly after posting third-quarter net subscriber additions well above its guidance and analysts' consensus forecast for the metric. In addition, management's guidance for strong fourth-quarter growth in revenue and subscribers sets a high bar as well.
Ahead of Netflix's fourth-quarter update on Jan. 17, here's a look at some key items investors will want to watch.
Net member additions
In the third quarter, the company added about 7 million net new members, crushing its guidance for 5 million member additions during the period. Can Netflix keep up this momentum?
Netflix guided for an impressive 9.4 million member additions in its fourth quarter (1.8 million in the U.S. and 7.6 million internationally). This figure is well ahead of the 8.3 million members it added in the fourth quarter of 2017.
Highlighting the company's strong growth overall, management guided for fourth-quarter revenue to rise 27.8% year over year. While this is a deceleration from the 34% growth Netflix posted in Q3, this forecast implies record quarterly revenue of about $4.2 billion -- $200 million more than in any previous quarter.
Earnings per share
Netflix's earnings-per-share guidance highlights a key challenge: hefty content costs as the company steps up its spending.
Management is guiding for fourth-quarter EPS of $0.23 -- down from $0.29 in the year-ago quarter. A forecast for lower EPS is due to expectations for a lower operating margin thanks to the lumpiness of content spend and a higher mix of original films in the fourth quarter, which have greater up-front costs than licensed content.
"We would have preferred our operating margin to have been a little steadier over the course of the year," management said in the third-quarter shareholder letter, "and we will target a little less quarterly variance next year in our progress to our full year target of 13% (assuming no major [currency] moves)."
Free cash flow guidance
Finally, Netflix investors should look for any revisions to management's outlook for free cash flow, or cash from operations less capital expenditures.
Because of its large cash investments in content, the company has been burning through lots of cash recently. Free cash flow came in at negative $859 million in Q3 and is expected to be around negative $3 billion for the full year. Furthermore, management currently expects negative free cash flow in 2019 to be similar to 2018 levels.
Any downward revisions to this forecast could be a red flag.
Management assured investors in its third-quarter shareholder letter that these investments make sense, saying, "We recognize we are making huge cash investments in content, and we want to assure our investors that we have the same high confidence in the underlying economics as our cash investments in the past. These investments we see as very likely to help us to keep our revenue and operating profits growing for a very long time ahead."
Netflix reports fourth-quarter results after market close on Thursday, Jan. 17.