Video-streaming giant Netflix (NFLX -0.27%) is gearing up for a third-quarter report after market close on Tuesday, Oct. 20. This report is sure to move the market whether it's good, bad, or ugly. Here's what Netflix investors need to watch out for in this important business update.
1. Netflix by the numbers
Management's guidance for the third quarter pointed to revenue near $6.33 billion and earnings in the neighborhood of $2.09 per share. The company should add roughly 2.5 million net new subscribers during the quarter, slowing down from 10 million additions in the previous report and 15.8 million net additions in the first quarter of 2020.
Critics worry about the downward growth trend here, but Netflix CFO Spence Neumann noted that the new subscribers seem to be aboard for the long haul. Therefore, it's probably more appropriate to widen your analysis of Netflix's subscriber growth, rather than focus on a temporary downtick right after a massive jump.
"We kind of look at the totality across the Q2 and Q3 period. And if we look at that period, two quarters in a row, the best we've ever done in that period is actually two years ago in 2018, where we grew by 11.5 million numbers," Neumann said in the second-quarter earnings call. "So if we, this year, deliver on that Q3 guidance, that means we're growing 12.5 million members in that same time period, which is 1 million more than we've ever done, which is big growth on top of what was already a very big Q1."
That's why Netflix's management would be satisfied with just 2 million new subscribers in the third quarter. I would not be surprised to see a somewhat higher number here, because movie theaters never really got going again, while Netflix continued to pump out dozens of original titles over the summer. Either way, this is the number that will move Netflix's share prices more than anything else next week.
2. How are the original productions coming along?
Netflix slammed the brakes on content production in March due to coronavirus concerns. At least some of the paused projects are back in action, including crowd-pleasers such as The Witcher and Stranger Things. We investors would love to hear more about the status of these important eyeball magnets, and I'll admit that the consumer in me wants to know when the new seasons of these great titles will hit my screen.
The company has said that the premiere schedule for the rest of 2020 won't change much because Netflix had completed the filming before the shutdown of the spring. The production crews are still making up for several months of lost ground, so the 2021 schedule may need some adjustment.
3. Looking ahead
If anything can compare to the market-moving power of Netflix's reported subscriber additions, it would be the guidance target for the same metric in the upcoming holiday quarter. Netflix is putting a bow on a very unusual year this time, with unique challenges balancing out against an equally unusual set of growth-boosting benefits.
The company is not afraid of making some changes to its business model, as seen in the sudden shift from DVD mailers to digital-streaming services nine years ago or the more recent decision to end 30-day trial periods for new subscribers. What else is Netflix changing up in preparation for the holidays, and how will these changes fit into the company's long-term business plan?
To put Netflix's subscriber addition targets for the fourth quarter into perspective, the company added 8.8 million new accounts in the year-ago period. At the end of the day, we'll have an updated version of this chart from the second-quarter report. The direction in which the red line will point at the end of the reported period and into the Q4 forecast may also have market-moving implications: