People are flocking to Netflix (NFLX 5.72%) as many entertainment alternatives worldwide have been temporarily suspended because of the pandemic. Demand for in-home entertainment is surging, and Netflix has been at the forefront, providing viewers with a vast library of thousands of titles and reliable service throughout the lockdowns.
The company reports its third-quarter results on Oct. 20. Here are three things to look for when Netflix releases earnings.
Subscriber growth is fueling profits for Netflix
First and foremost, investors will want to look at subscriber growth in the third quarter. In the first half of 2020, Netflix added a total of 26 million paid subscribers, nearly matching the additions seen in all of 2019. This led the company to tamp down expectations in the latter half of the year and forecast sequential member growth of 2.5 million in the third quarter. However, with coronavirus cases still surging in many regions of the world, it is likely the company will exceed its guidance. As of June 30, the company had a massive base of 193 million subscribers worldwide.
Investors should also keep an eye on revenue growth. In the second quarter, revenue increased 24.9% year over year. For the current period, Netflix expects revenue to grow 20.6%, which would be the lowest rate of growth since the second quarter of 2013. Notably, as of June 30, Netflix offered plans from as low as $3 per month to over $20 per month, depending on the country and the tier of service purchased. Overall, average revenue per user (ARPU) was $10.80 last quarter -- up ever so slightly from the ARPU of $10.76 in the prior-year period. With most of the global economy trying to battle a pandemic, increasing prices do not appear imminent.
Lastly, look for management to discuss the state of content creation. Many productions were put on pause to help slow the spread of the coronavirus. The combination of revenue growth and low content expenses led to Netflix reporting $899 billion in free cash flow in the most recent quarter. Additionally, the company's operating profit margin increased nearly eight percentage points year over year to 22.1%.
The good news is that the company does not expect less new content to be a competitive disadvantage. In the second-quarter shareholder letter, management noted, "The pandemic and pauses in production are impacting our competitors and suppliers similarly. With our large library of thousands of titles and strong recommendations, we believe our member satisfaction will remain high."
Netflix can benefit from continued growth and expanding profitability as long as consumers remain hesitant to travel, dine out, or do anything else that may expose them to COVID-19, making this consumer goods stock one to watch. As millions of people cut the cord and turn to streaming for their digital entertainment, the challenge for Netflix will be fighting off the new competition.