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Netflix Posts Strong Growth Even as It Faces Tough Comparisons

By Daniel Sparks – Updated Jul 21, 2021 at 8:02PM

Key Points

  • Netflix added more members in Q2 than management expected.
  • Growth in average revenue per membership helped bolster the quarter's results.
  • Management expects membership growth to accelerate during Q3.

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The streaming-TV specialist's revenue grew by an impressive double-digit rate on a year-over-year basis.

Netflix (NFLX 0.41%) just announced second-quarter revenue of $7.34 billion, beating analysts' average forecast for revenue of $7.32 billion. To pull this off, revenue grew 19% year over year during the period, with subscribers rising to a record high. The robust results during a period when the company was up against an incredibly tough year-ago comparison show how strong the streaming-TV company's momentum is.

To fully appreciate Netflix's momentum, here are some key takeaways from the quarter.

A couple watching TV together.

Image source: Getty Images.

Subscriber growth

Netflix added 1.54 million new subscribers during the quarter. This was ahead of management's guidance for 1 million new subscribers during the period. 

The streaming company's ability to grow subscribers every quarter this year, following a pull forward in demand last year when consumers were sheltering at home, suggests that Netflix is still early in its growth story. Total second-quarter subscribers were about 209 million -- up from approximately 193 million in the year-ago quarter.

Reflecting Netflix's challenging year-ago quarterly comparison when the company added 10 million new members, subscriber growth was slow compared to previous quarters, growing just 8.4% year over year. This is down from rates between 13.6% and 27.3% in each of the last four quarters. But investors should be encouraged that the company is now guiding for a reacceleration in subscriber growth as tough year-ago comparisons fade. Management said it expected third-quarter subscribers to grow 9% year over year to nearly 213 million. This translates to a forecast for 3.5 million new subscribers during the quarter.

"COVID has created some lumpiness in our membership growth (higher growth in 2020, slower growth this year), which is working its way through," management said in Netflix's second-quarter shareholder letter.

For eagle-eyed investors wondering why revenue grew so much more rapidly than subscribers during Q2, consider that the company is also benefiting from growth in average revenue per membership. This key metric increased 8% year over year.

Profitability

Netflix's scalable business model continues to pay off. Its operating margin expanded three percentage points year over year to 25.2%. This helped operating income increase from approximately $1.4 billion in the year-ago period to more than $1.8 billion this quarter.

Though free cash flow for the period was negative $175 million, management still expects its free cash flow for the full year to be breakeven or better. This is an impressive view from management considering how much the company's spending has grown in recent years (driven primarily by investments in content). Netflix is expected to spend more than $17 billion on content this year, up from less than $5 billion in 2015.

The company believes aggressive reinvestment in its service will lead to more growth in its user base and, subsequently, continued expansion of its operating margin and profit dollars.

Editor's note: A previous version of this article referred to Netflix's quarterly operating profits in 2016 as expenses. The article has been corrected. The author regrets this error.

Daniel Sparks has no position in any of the stocks mentioned. His clients may own shares of the companies mentioned. The Motley Fool owns shares of and recommends Netflix. The Motley Fool has a disclosure policy.

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