Here's What Investors Should Look for in Netflix's Earnings Report

Netflix (NFLX 1.74%) is on the forefront of the shift toward streaming entertainment, but slowing subscriber growth and lower-than-expected earnings in the second quarter have some investors feeling nervous. In this Backstage Pass video, which aired Sept. 29, 2021, Motley Fool contributor Trevor Jennewine discusses what to look for when Netflix reports its third-quarter results later this month. Netflix is slated to report earnings on Oct. 19.

Trevor Jennewine: I'm willing to bet all of our viewers have heard of Netflix, pioneer and streaming media and still industry leader. However, the stock has not been a market beater over the last year, up about 20%, 21%, while the S&P 500 is about 32%.

To put some context around that, last quarter, Netflix paid memberships came in at 209 million, which was up just 8%. I think that slowing growth as the pandemic is, hopefully, winding down, I think that spooked Wall Street a little bit. The average monthly revenue per paying membership was up eight percent though, up to $11.67 -- that's always worth paying attention to.

The other numbers looked fairly strong now: $7.3 billion in revenue last quarter, up 19%. Earnings per share was $2.97, up 87%. One thing that I didn't particularly like is free cash flow on a quarterly basis was negative again, but still positive over the trailing-12-months. About $900 million in free cash flow over the trailing-12-months.

Taking a look at the third quarter management is looking for $7.5 billion in revenue, up about 16%. Slowing a little bit on a sequential basis. Same thing with the earnings per share at $2.55, up 47%. Then calling for a memberships of 212.7 million, which again a little slow -- up 9%. So what I'm going to be looking at are all of those three metrics.

First of all, the revenue, earnings and especially how quickly they're growing their subscribers. I will be looking especially at some of the different geographies where the subscriber base isn't as large. United States has a fairly large subscriber base, but there's a lot of room to grow in places like Latin America and Asia Pacific. I'll be looking at the geography-specific subscriber growth. Then paying attention to the average monthly revenue per membership; this reflects Netflix's ability to raise its prices. I think the company's original content strategy gives it an edge. Or at least that's the idea, is to be producing content that only Netflix has and hopefully that's bringing viewers to the platform. They're producing a lot of good content. They just won 44 Emmys, I want to say. They're producing lots of content and a lot of it's gaining traction with viewers. They have new releases all the time. They have The Witcher coming this December. I think that's got a lot of people excited.

Then, also be paying attention to free cash flow. Let's see here. I misspoke earlier. The trailing 12 month free cash flow is $1.4 billion for Netflix. Over the last 12 months, they have $1.4 billion in free cash flow. They became free cash flow positive in 2020. Like I mentioned, last quarter, specifically, just on a quarterly basis, they generated negative free cash flow. I'll be looking to see if that turns around.

That was one of the fears a lot of investors had about this company for a long time, that they are spending so much on content once the company going to be profitable or whether they're going to generate positive free cash flow. It was nice to see that happen in 2020. Then any other comments, they have as far as competition in the space with other players like [Walt Disney's] Disney+. Reed Hastings, as mentioned in the past, that they didn't really see any impact of competition on Netflix's business. But it's always interesting to get management's takes on just the competitive landscape of the industry.