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Netflix Earnings: How High Will Usage Spike?

By Demitri Kalogeropoulos – Apr 16, 2020 at 7:15AM

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More at-home time should mean higher profits for the streaming video leader.

There's a small group of stocks whose first-quarter earnings results investors are eagerly anticipating these days, and Netflix (NFLX -6.36%) tops that list. The streaming video industry is one of the few entertainment avenues left to people around the world who have dramatically boosted their stay-at-home time because of COVID-19 containment measures.

Its leadership position in that market is adding to the optimism around Netflix's earnings report on Tuesday, April 21, which could show unusually high subscriber growth and profits. But those aren't the only metrics worth following in this week's report. Let's look at the key trends that investors will be watching on Tuesday.

A man watching TV.

Image source: Getty Images.

Engagement

The first quarter runs through March, which includes the period of sweeping stay-at-home orders by governments across Europe and North America. These recommendations coincided with the removal of a wide range of other entertainment options, from movie theaters to theme parks to restaurants. 

That's why it's likely Netflix will surpass the guidance it issued in late January that called for 7 million new members across its global portfolio. The company has a high bar to clear if it wants to achieve accelerating growth, though, since it gained a whopping 9.6 million subscribers in last year's first quarter. But approaching a repeat of that figure isn't out of the question.

The bigger trend to watch is engagement, or the amount of streaming time spent per day by the average subscriber. This metric translates into customer loyalty by pushing renewal rates higher. Yet there is a direct but delayed impact on profitability, too, because Netflix bases its pricing changes on engagement. CEO Reed Hastings and his team use streaming hours as a proxy for the value that customers are getting out of the service, and so a big boost in that figure would support the next monthly price increase.

There are indications that subscribers have ramped up their streaming hours, including the fact that Netflix had to throttle back bandwidth in parts of Europe in late March. Executives will likely also point to some hit releases in the quarter, particularly Tiger King and the third season of Ozark.

Looking ahead

Rising usage levels might persuade management to issue a bullish outlook for the second quarter, which is going up against a relatively weak prior-year period of just 2.7 million member additions. That outing was Netflix's softest of 2019, and so the company might easily reach accelerating gains that push sales growth back above 20%.

It's too early to tell whether the streaming giant can return to accelerating global growth on an annual basis this year after slowing in 2019. The COVID-19 pandemic is hurting the business in some areas (by pausing most new-content production, for example).

Still, Netflix has its biggest, most engaged global audience to date, and management is no doubt focused on using that platform to boost the value of its franchises.

That goes the same for established TV series like The Witcher or a movie with high production value like Extraction, set for release on April 24. Rivals like Disney are moving to a straight-to-streaming release schedule for many of their top-tier films right now. But Netflix has been laying that foundation for years, in just one more way its business seems tailor-made for today's entertainment landscape.

Demitrios Kalogeropoulos owns shares of Netflix and Walt Disney. The Motley Fool owns shares of and recommends Netflix and Walt Disney and recommends the following options: long January 2021 $60 calls on Walt Disney and short April 2020 $135 calls on Walt Disney. The Motley Fool has a disclosure policy.

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